IRS Targets more small-business audits; Agency will add nearly 3,000 new enforcement agents
June 26, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – The results of significant reorganization at the IRS will now lead to an increase in the number of IRS Audits and Examinations the agency will conduct, with a special focus on small-business returns.

The agency recently announced it will be adding between 2,200 and 2,900 new jobs aimed primarily at enforcement and audits between 2004 and 2005. This initiative will be the first major step in increasing the focus on enforcement and audits in several years, and will mean that more small-business returns will likely become the target of an IRS Audit.

As a part of the restructuring efforts over the past few years at IRS, the agency now has more sophisticated tools, computer resources, and information matching capabilities that will enable its reach to expand into the lives of small-business owners in many ways.

The IRS has become SMARTER – Despite the setbacks in operational issues at IRS, and budget cutbacks in previous years by congress, the IRS has become smarter at its efforts to target tax returns that may yield potential problems in underpayment of taxes. However, not all is lost to the small-business owner as it turns out.

Effective counter-measures, more sophisticated definition of business segmenting, and a better understanding of business types has also led to private firms, such as Tax Smart America, a San Diego based subsidiary of Smart America Group Enterprises Inc. (SAGE) to develop much higher standards of education for professionals, which means that many tax professionals now have an effective means by which to identify these potential audit issues, correct the problems BEFORE an audit occurs, and in many cases recover substantial overpaid taxes, in some cases as much as $100,000 and more for the small business owner over the past three years.

The Important Message – If there is an important message in this new effort by IRS it is this. First, every business owner should get a second opinion about their tax returns. Not all tax professionals are created equal. Second, every business-owner should know and understand every potential audit issue and “Red Flag” and take immediate steps to position the return in an effort to defend the filing should the IRS select it for audit. Recent reports from the GAO indicate that more than 40% of professional prepared returns contain errors and omissions costing business owners billions in overpaid taxes.

This shocking result has now spurred wider interest in amended returns. For example in 1990 IRS processed nearly 335,000 amended returns. Compare that to the 2004 estimates of more than 4.2 million anticipated amended filings expected by IRS. This clearly reflects the need for a second opinion of all tax returns.

For more information contact Tax Smart America at (619) 469-5800.