Increase in IRS Audits – A Positive Trend?
As the newest member of the AICPA Tax team, I was awestruck during my experience at the National Tax Conference. I had a front row seat for Acting Internal Revenue Service Commissioner Danny Werfel’s address; alternated between laughing my head off and cheering at National Taxpayer Advocate Nina Olsen’s candid presentation; and instinctively ducked under the table so as not to be called out by the Director of the Office of Professional Responsibility.
But the presentation that hit me the most? Faris Fink, Commissioner of the IRS Small Business/Self Employed Division, who spoke about the division’s initiative to provide advanced partnership examination training to their revenue agents (aka “auditors”). The goal is to increase audits of partnership tax returns with an emphasis on administrative matters in addition to the usual compliance issues.
Having been through a number of audits, I can say that I would take a well-trained, seasoned auditor any day over someone new to the field. In fact, early in my career, someone compared a new IRS auditor to a baby rattlesnake. Having been raised in the Arizona desert, I knew right away what they meant.
If you are unlucky enough to be bitten by a rattler, just hope that when you look down there is a not a tiny snake still stuck to your leg. Baby rattlesnakes haven’t learned to pace the amount of venom they unleash when they bite. So, a bite from a baby can actually be more dangerous than the bite of a full grown rattlesnake, a fact you will soon grasp as the painful venom starts coursing through your bloodstream.
In the same way, many of my peers often thought that newer, less experienced IRS auditors might be overly aggressive in applying their authority, having not been through the painful process of appeals and finding a case file back on their desk to rework. Perhaps they did not have the experience to know which items were truly material, so instead would ask for everything but the kitchen sink and then scrutinize every single item. I have heard stories from many colleagues who felt they spent much of their time during an audit educating the auditor.
This new initiative leads me to believe that things are actually looking up in the area of partnership audits. Yes, audits are expected to increase, however I believe the very nature of a highly trained team making targeted selections is beneficial for everyone. Partnerships that are following their operating agreements and complying with applicable filing requirements will have far less to fear from such a team than they would facing a young, untrained auditor.
Knowing that the IRS will be coming to the table with a competitive edge, you should arm yourself with as much knowledge as possible. Two resources I recommend for partnership audit preparation:
- IRS Partnership Audit Technique Guide – this is the IRS manual for their auditors to use when auditing partnerships; very helpful to review prior to representing a client in an audit.
- IRS.gov page on audits of small businesses – an overview of rights, required records and FAQs.
If you have other resources or tips about audit preparation, please share!
Cari Weston, CPA, Senior Technical Manager - Taxation, American Institute of CPAs. Cari serves as staff liaison to both the Partnership and S Corporation Tax Technical Resource Panels as well as the Tax Practice Management Committee. Cari has spent close to 20 years in the practice of public accounting with an emphasis on taxation of closely held businesses. She obtained a Bachelor of Science in Accountancy and a Master of Taxation from The W.P. Carey School of Business at Arizona State University.
Rattlesnake image via Shutterstock