For Florida business owners, receiving notice that the Internal Revenue Service (IRS) intends to audit your corporate return may be alarming. The idea of going through an IRS “Enforcement Examination,” the official term for an audit, is intimidating when you consider the penalties you may face for an improperly prepared return; it is also exhausting because of the energy and effort you must expend to defend your company’s interests.
In an ideal world, you could accurately predict the circumstances that may lead the IRS to audit your company. However, the probability depends upon a complicated set of facts and circumstances, because every corporate return is highly unique. You should rely on the advice and counsel of a knowledgeable Florida business law attorney for tax matters, but some statistics on IRS audits of corporate returns may be useful.
IRS Audit Statistics on Corporate Returns
Generally, the IRS conducts an audit to determine if a properly reports income, expenses, credits, and deductions. For corporations, the likelihood of an examination is closely tied to the value of company assets, so:
- Your business has a 0.9 percent chance of an IRS audit if your company assets are valued under $1 million;
- There is a 2.1 percent chance of an IRS audit on your company return if it owns assets between $1 million and $10 million in value;
- Corporations with assets in excess of $10 million have a staggering 17.2 percent chance of an IRS audit.
Note that these statistics are for C corporations; the rate of returns for pass through entities, including partnerships and S corporations, is 0.5 percent.
Common Reasons for IRS Audits
Though the probability of an IRS audit is tied to the value of a corporation’s assets, there are factors that make an examination more likely. Fortunately, these are issues you can avoid with help from a tax professional and/or attorney.
- Payroll Taxes: The temptation to use payroll taxes for operating expenses is great, but corporations must safeguard these and turn them over to the federal government when due.
- Billing Personal Expenses to the Company: The IRS heavily scrutinizes situations where a corporate return includes an officer’s personal use of a vehicle, or where a construction company bills for improvements to an officer’s personal residence.
- Business Expenses and the American Tax Cuts and Jobs Act: With the passage of the American Tax Cuts and Jobs Act, business owners can no longer deduct business expenses unless these items are listed in Section 274(e) of the Internal Revenue Code (IRC).
- Mistakes and Poor Recordkeeping: While it is human to make mistake, the IRS has little sympathy for math errors. Double and triple checks may reduce mistakes, but retaining tax specialists will help.
A Pinellas County Business Litigation Lawyer with IRS Audits on Corporate Returns
If you would like more information on how to avoid becoming an IRS audit statistic, please contact Clearwater Business Law at (727) 785-5100. Our experienced attorneys assist with all types of business law matters for clients in Clearwater, FL and throughout Pinellas and Hillsborough Counties.