IRS criticized for S-Corp audits in California and across the U.S.

The popularity of S-Corporations has continued to rise for small business owners. According to the Internal Revenue Service, the number of tax returns filed on behalf of S-Corporations is steadily increasing. However, an IRS watchdog organization has recently released a report criticizing the effectiveness of the IRS audits of S-Corps in California and across the nation.

According to the report, more than 98 percent of S-Corporations have $10 million or less in assets. However, in a sample of S-Corporations that were audited, some 62 percent of the audits yielded no changes in taxes owed. This finding led the organization to conclude that the IRS was spending a substantial amount of resources on audits that were not productive.

The IRS agreed with the watchdog's findings. Despite the findings however, the watchdog acknowledged that it was not clear as to exactly how much money was recovered by all of the audits conducted on S-Corporations. Still, it asserted that the IRS needed to be more effective in how they conduct their audits of small businesses.

With the many tax advantages for California entrepreneurs to file their business as an S-Corporation, it is no wonder that these corporations continue to rise in popularity. With this popularity, however, may come an increased level of scrutiny from the federal government. As a result, it is more important than ever before for small business owners to ensure that their taxes are properly and professionally filed. This will minimize the risk that these businesses face of enduring lengthy audits that could diminish their businesses productivity. And if an audit is scheduled, the right representation may go a long ways toward making it a formality without a significant change in taxes owed.

Source: Reuters, "Small Business Audits A Waste Of Time, Watchdog Says," Patrick Temple-West, July 25, 2012

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