Get Ready: The IRS is Increasing Audits of Small Businesses

Jan 20, 2021 | Small Business, Taxes

The Internal Revenue Service is planning to increase the number of audits of smaller businesses and their investors by about 50% in 2021, following years of persistently low examination rates, an agency official announced in late 2020.


The result could be a surge in audits of companies ranging from the local mom-and-pop retail stores to new startups to established mid-sized enterprises that have historically faced only infrequent checks thanks to the time and effort required at the IRS.

“The IRS is focusing our efforts to increase compliance activity in this area of not only partnerships, but also investor returns related to pass-throughs,” De Lon Harris, the IRS deputy commissioner of examination for small businesses, said at an American Institute of Certified Public Accountants event. For 2021 “we are planning for 50% more than we had in the previous year.” 

Pass-through entities, which include partnerships, limited-liability companies, and sole-proprietorships, are incredibly difficult for the IRS to audit because they frequently have complex structures that can involve dozens of inter-related entities. Pass-throughs don’t pay taxes themselves, but “pass” along the profits and tax liabilities to investors—who then pay the taxes on their individual returns.

The IRS is hiring more specialized auditors to work these cases, with the aim of having them in place by February, Harris said. The IRS can select returns to audit that are up to three years old. If the agency finds significant problems in a taxpayer’s filings, the auditors can examine returns that are even older.

New audit procedures that Congress approved in 2015 mean that the IRS can more easily collect any underpaid taxes it finds during the audit. Instead of having to track down each investor, the IRS can now collect the money from the partnership itself.


In addition to small businesses, The IRS recently announced that high-income households will be the target of increased enforcement efforts. The Service is aiming to increase compliance amongst high-income taxpayers following a Treasury Inspector General for Tax Administration report earlier this year finding that billions of dollars in tax revenue is being lost due to lax enforcement against high-income individuals who fail to report substantial income or fail to file tax returns. The IRS has outlined a two-pronged initiative focusing on certain business owners and non-filing individuals. The IRS identifies high income as those earning $100,000 or more.

One final note, if you have not filed, there is no statute of limitations and the IRS may pursue claims at any time.


Don’t go it alone when dealing with the IRS. The truth is, the agency is currently understaffed and behind on processing correspondence and audits already in process. In our experience this is leading to errors and lengthy delays on their part. Even the IRS was affected by COVID and many of their offices closed for 3 months during the early days of the pandemic. What normally would take a few weeks to resolve is now taking months and in some cases years to resolve.

Taking proactive steps to minimize tax audits are important to protect your personal and business assets. If you need help with your business or personal taxes, we are here to help you! Here at CRS CPAs, we advise clients who have complex tax situations—including those involving pass-through entity ownership and private foundations. Give us a call and we will be glad to sit down with you and work through your tax concerns.

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