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March 4, 2021
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The IRS is planning to ramp up audits of small businesses and their investors by about 50% next year, following years of low examination rates.
The result could be a surge in audits of companies ranging from mom-and-pop retail stores and technology startups to investment funds 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 (Investment News).
A 50% increase in the number of new audits next year could still mean that the agency has a long way to go to resume higher audit ratios, because it’s starting from a low base. The IRS audited only 140 partnership returns of the more than 4 million returns filed in 2018 — less than 0.00004% — according to the most recent data from the agency. That’s down from about 0.5% of partnership returns that were audited in 2010. For S corporations, another type of pass-through entity, the IRS audited 397 returns — roughly 0.01% of all filed — in 2018, according to agency data.
The IRS is hiring 50 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 (Bloomberg).
At the onset of the pandemic 140,104 businesses were marked temporarily closed on Yelp.com, but by August that had fallen to 65,769. That drop, however, is not entirely driven by businesses reopening; instead, many have simply gone under. More than 100,000 businesses have permanently shut down during the pandemic. While many parts of the economy have begun to open again, many small businesses are still struggling. “If economic trends continue at this rate, one in five business owners anticipates they won’t make it until the end of the year,” Kevin Kuhlman, the vice president of federal government relations for the National Federation of Independent Business said (Fortune).
But not all small businesses have been equally affected. According to a Federal Reserve Bank of New York report in August, the number of active Black small-business owners fell 41% from February through April (nearly twice the rate of non-Black-owned businesses), as many struggled to access programs like the Paycheck Protection Program.
Amid a new surge in COVID-19 cases and the arrival of the first vaccine doses, most (62%) small businesses fear that the worst is still to come from the virus’ economic impact, and three-quarters (74%) of all small-business owners said they need more government assistance to survive. That number is 81% among minority-owned businesses. Only four in 10 (40%) of all small-business owners surveyed believe their business can keep operating without having to close permanently (The Inquirer).
POLITICS EDITOR: CARSON CHOATE