IRS Business Audit CPA offers insights on handling a Business tax audit of Form 1120-S and Form 1065

First some good news for S Corporations; from a Treasury Report, as seen in Accounting Today. It confirms the CPA chatter over the last few years. The IRS closes a high percentage of corporation tax return (Form 1120-S) audits with no adjustments, suggesting that many of the audits are unnecessary and unproductive. It further suggests the IRS should adjust its data mining to better select which Form 1120-S(s) to audit.

The former IRS Commissioner Mark Everson gave an unrelated interview in Accounting Today about how S Corporations and Partnerships (Form 1120-S and Form 1065) should handle an IRS business tax audit. He says both Form 1120-S tax audits and Form 1065 audits are on the rise. from a 5.57% audit rate in 2008 to 12.48% audit rate in 2011. Why? The shareholders and partners are wealthy.

Business Audit CPA’s top 7 IRS hit list

What are the underlying business tax audit issues?

• Transfer pricing. Especially in international companies.
• Offshore bank accounts.
• Passive activities.
• Hobby income. So, they’re not just targeting the wealthy, most hobby companies are small.
• Executive compensation. Remember S Corporation distributions avoid self employment tax.
• Employee / Subcontractor classification issues.
• Unreported income.

Here are the former IRS Commissioner’s suggestions on how to handle a business tax audit. Most of this is cut and pasted.

• Assemble your team. Immediately.
• Don’t disrespect the IRS agent.
• Establish the scope of the examination.
• Meet deadlines.
• Document production and interviews. Organize and label documents. Personnel should be knowledgeable and well prepared. Dumping irrelevant documents on the agent or stonewalling the agent with people who can’t provide the necessary information is not in your interest.
• Conduct your own review. I have seen businesses have great success in an audit when they go beyond what is required by the IRS. For example, work with your tax professionals to engage in a thorough scrubbing to see if tax credits or incentives not previously taken (or fully taken) by the business can be raised. This scrubbing during the exam process can result in actually receiving a check from the Treasury.

“This is the best plug for CPA tax audit representation I’ve ever read! Thanks Commissioner.”
- Gary Bode, business tax audit CPA

• When necessary, see the manager. Ask to meet the agents’ manager to resolve a question of law or fact. To its credit, IRS senior management actively encourages business owners to go up the chain of command to seek a resolution.
• Mediation and arbitration. The IRS has significantly expanded the opportunity for taxpayers to seek a resolution through mediation and arbitration. While it is more art than science as to when it is appropriate, mediation and arbitration are great avenues to consider for solving a problem.
• Appeals and litigation. From the moment you receive an audit notice, be aware you may have to seek a resolution either through mediation, arbitration, IRS appeals or even litigation. This means having a clear record of what facts were provided to the IRS and also ensuring the legal issues have been properly developed and put forward.

We’re business tax audit CPA firm that provides client representation for IRS issues. Our virtual office allows us to represent you irregardless of location. The business tax audit strategies above do not encompass all aspects of an IRS examination. If you don’t have an experienced IRS business tax audit CPA, you need one now. Please consider calling us for a free consult at (910) 399-2705.