More IRS small business audits coming in 2021

If the chaos of the pandemic and year-end caused your finance team to put the idea of an IRS audit on the backburner, it’s time to bring that focus front and center again.

IRS is planning to increase the number of small business audits it conducts this year, according to De Lon Harris, the IRS deputy commissioner of examination for small businesses. In fact, the Service hopes to administer 50% more audits in 2021 compared to 2020.

At a recent AICPA event, Harris explained that IRS has maintained fairly low audit examination rates of some taxpayers. Essentially, this was due to the time and effort it takes for the Service to initiate and conduct detailed audits.

But this year, it’s looking to change the trend. The Service even plans to hire 50 more specialized auditors to help its efforts and meet that 50% increase goal.

Who’s a target?

“Smaller businesses” could mean anyone from mom-and-pop shops to tech startups. They’re the kind of companies that in the past may’ve only faced occasional IRS checks, says Laura Davison of AccountingToday.

Harris specifically said that IRS is determined to “increase compliance activity in this area of not only partnerships, but also investor returns related to pass-throughs.” Pass-through entities, like partnerships or LLCs, are said to be some of the hardest taxpayers to audit, since they often involve many related entities and complicated structures, Davison adds.

Whether your company falls within the smaller business category or not, all CFOs should take heed. Knowing IRS is boosting its efforts is enough reason to alert your finance staff to stay on their toes. And for peace of mind, staffers may even want to review their audit practices and recordkeeping systems.