IRS Examination announced shift in focus

The IRS is increasing scrutiny on small businesses.  The shift in focus is not a new approach but a reallocation of resources that have already been stretched extremely thin. With limited resources and a shrinking budget the IRS has to determine the most cost effective and beneficial allocation of their resources. Several factors have led to this shift in examination focus.

1) Companies that have been profitable in the past may be utilizing net operating losses in current years and are either carrying back those losses to previous years or electing to forgo the carryback and will recognize the net operating loss carry forward in future years. Flow through entities beware, the IRS is looking at basis to determine if the shareholder or partner has adequate basis to recognize the loss.

2) Complex entity structures with multiple subsidiaries or multiple shareholder types may necessitate the IRS to extend their examination to these additional entities and dramatically increase representation costs. Unfortunately the entire cost of representation is solely the responsibility of the entity being examined, even when the examination results in no change.

3) New legislation and tax policies have increased the scrutiny of mid to small business entities that utilize credits to ensure compliance with complex credit calculations such as the small employer health insurance credit.

If you receive notification by the IRS that they are going to examine your records, make sure you have experienced and qualified representation.  You wouldn’t represent yourself in a criminal trial, why try to handle an audit yourself where there is no judge or jury of your peers?