IRS Needs Help to Improve Small-Business Audits, Official Says

Admitting that it needs help in auditing small businesses, an Internal Revenue Service commissioner says it's sharpening its focus on partnerships.

Contrary to what many small-business owners and CFOs may think, the Internal Revenue Service’s audit programs are not designed to give “nightmares” but to create less of them, Faris Fink, an IRS commissioner, said at an American Institute of Certified Public Accountants tax conference Tuesday. Fink acknowledged that the service could use help in its small-business audits.

75px-US-InternalRevenueService-Seal.svgFink, who represents the Small Business/Self-Employed Division of the IRS, said the IRS has designed its research and other compliance programs to help weed out unwarranted audits of small businesses. For example, data collected from the service’s National Research Program (NRP) is helping to educate IRS staff and improve their “selection criteria” when it comes to auditing company returns. In that way, the NRP can help IRS small-business auditors do a better job of selecting which returns have the potential to have some problems, he said.

The NRP has been helping Fink’s division delve into areas the IRS hasn’t looked into for decades, such as fuel-tax-reporting compliance. For that project, which began in July 2012, the IRS is looking at over 1,000 tax returns, said Fink, with 600 of those returns in the field right now for examination.

“The examination is far more invasive than what we have done in the past,” he added. The IRS’s small-business NRP representatives  check company returns going back one year, while the NRP reps for large firms look back five years.

But fuel tax isn’t the only program aimed at helping IRS staff to figure out the workings of small businesses. Fink’s group underwent a series of virtual training sessions last year on how partnerships work. The IRS began its new partnership curriculum after realizing that the influx of staff hires in recent years did not have sufficient training around partnerships, and auditing partnerships, in particular. (Fink did not say who provided the virtual training.)

“We have not en masse done that type of training virtually ever as an agency. We just haven’t,” he said, noting that some questions still remain over its effectiveness.

But understanding how to audit partnerships “will be a point of emphasis for the next twelve months and, I guarantee you, beyond that,” added Fink. “We’ve got to develop a short-term and long term training plan to put the right tools in our examiners’ hands so they are more capable and better at looking at flow-throughs and particularly partnerships.”

The partnership training, according to Fink, is important for the growth of IRS agents themselves. “We’ve got to increase or enhance those skill sets to be effective. We’ve got to be better at identifying technical issues and auditing technical issues,” he said.  The private sector, Fink acknowledged, has skills in the virtual training area that IRS agents do not have.

“It’s going to be challenging,” he said, “as we grow this initiative.” The IRS’ large business and international division is also involved in the training along with the small business unit, with both groups sharing information.

8 thoughts on “IRS Needs Help to Improve Small-Business Audits, Official Says

  1. “The examination is far more invasive than what we have done in the past,” he added.

    Sounds like a nightmare to me

  2. IRS, follow the wires:
    Audit companies that wire money $100k+ at a time out of the country.
    Audit transfer pricing.
    Deloi te seems to tell companies to NOT keep their justification/ backup for transfer pricing in the USA, so you can’t get at it, you must subpoena it from the foreign parent company.
    The Big 3 Audit firms should not be able to keep attorney-client privilege type files of incriminating evidence — they are not attorneys — they should be required to report all violations to IRS, not be in bed with the criminals.
    Audit firms that show years of consistent losses, duah.
    Audit all non-US citizens operating in US under Delaware Inc. which is further owned by a foreign company, however the owners are US residents, domiciled in US, (with kids born and raised here). They wire all the money out of country — audit all “transfer pricing” even if it is a form of art like a film negative.
    Audit all partners of $30Mil+ companies that claim to make only small compensation ($139k, just at the max payroll tax mark) in US, very suspicious.
    Audit company owners here on residency cards.
    Audit entertainment companies.
    Be sure foreign subsidiary financials consolidate properly and eliminate properly with US domestic company/parent.
    Demand FBARS, follow wires-out, collect years of tax evaded, then put them in jail.
    Audit importers’ transfer pricing.
    Mandate that all accounting records for US subsidiaries be maintained and available in US parent Inc. Do not allow outsourcing of general ledger accounting to other countries despite “cloud” software.

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