Quality Control Concerns in IRS Audits of Closely Held Corporations

The majority of American corporations are considered to be closely held because they are owned by a single shareholder or a closely knit group of shareholders. These shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities for the shareholders to structure transactions so as to reduce the income taxes owed by the corporation or the shareholder. Often times, the shareholders are unfamiliar with the esoteric principles and improperly structure these transactions. As a result, closely held corporations have become a favorite target for the IRS. However, it turns out, it is not just corporations that have problems following proper procedures and guidelines, but IRS examiners as well.

Treasury Inspector General for Tax Administration (TIGTA), who provides oversight of Department of the Treasury matters involving Internal Revenue Service activities, recently reviewed whether IRS examiners followed proper procedures and guidelines when auditing the returns of small corporations.

The TIGTA report found quality concerns in 37% of the audit of closely held corporations. For example, IRS examiners did not always document the steps taken to investigate significant differences between the labor costs deducted in the corporate return and the amounts reflected on employment tax returns filed with the IRS.

You can read the entire TIGTA report here.

If you, or your closely held corporation, are being audited and you have concerns regarding how the audit is being conducted, contact one our experienced attorneys at (916)488-8501.

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