One IRS official has indicated that the focus of tax audits concerning small businesses may shift from corporations to varying types of partnerships. This is in part because partnerships have grown in number and have also become more complex.
The concern regarding partnerships may be in part the pass-through status when it comes to taxation. By pass-through, we mean that the individuals owning the partnership are taxed rather than the business itself. The IRS official admitted that the agency was “a little bit behind the curve in getting around to developing a partnership strategy.”
IRS employees may lack experience concerning dealings with partnerships. We are now seeing partnerships with as many as 82,000 partners. Some of these partnerships can have between 125 to 182 tiers. This is very different from when partnerships would have around 10 partners per business. The IRS now feels that they have to pay much more attention to these entities.
While the IRS attempts to become more informed regarding the dealings of partnerships, partnerships will also likely have to adjust to more scrutiny being brought down from the IRS. Tax audits can lead to costly mistakes. It’s often good for California businesses facing possible tax audits to hire on experienced tax attorneys for at least two reasons: (1) tax attorneys can advise businesses on what steps to take in advance of any tax audit to make certain that all records are in order; and (2) these attorneys can represent businesses in court in the event that irregularities are claimed by tax officials.
There are also a number of strategies that attorneys can use in protecting businesses from being assessed penalties over questions concerning taxes.
Source: Bloomberg, “Small-Business Partnerships to Be Priority of IRS Exams: Taxes,” Lydia Beyoud, Nov. 11, 2013