New Noncompliance Focus for the IRS – A recent study by the Government Accountability Office identified a growing problem with the business tax noncompliance of S-Corporations and Partnerships. While the noncompliance rate for these business entities has historically been high, it has recently become an area concern due to the fact that S-Corporations and Partnerships represent an increasingly greater percentage of the county’s total business tax income. Although the existing data is not sufficient to support an accurate estimate of the total tax dollars lost due to the tax noncompliance of S-Corporations and Partnerships, past studies indicate that the amount is significant. For this reason, the Government Accountability Office is urging the IRS to make reducing the business tax dollars lost from these entities a top priority.
The last study of S-Corporations using data from 2003 and 2004 showed that these business entities underreported approximately 15% of their income, amounting to a total business tax shortfall of over $50 million for the two tax years. Although no similar data is available for Partnerships, the Government Accountability Office was able to use the S-Corporation data to extrapolate that over $90 billion business tax dollars were lost between 2006 through 2009 from S-Corporations and Partnerships alone. Although the GAO acknowledges that its compliance data is inaccurate, they maintain that there is enough evidence to indicate that the loss of business tax dollars from these business entities should be an area of focus for the IRS.
The IRS has previously stated that the business tax noncompliance rate of S-Corporations and Partnerships is hard to pinpoint because the income from these entities generally flows through to be reported on the income tax returns of their shareholders and partners rather than being reported on the business return. Furthermore, the agency admits that is does not have a good strategy for tracking how the income of a Partnership or an S-Corporation affects the taxes paid by the partners or owner/shareholders. As a result, its process for selecting Partnership and S-Corporations returns for an IRS audit is inaccurate. The Government Accountability Office maintains that improving the audit selection process is the most effective way to reduce the noncompliance rate.
Since some of the inaccuracy involved in selecting returns for examination would be corrected if a greater percentage of S-Corporations and Partnerships were required to electronically file their tax returns, the Government Accountability Office has suggested this as a potential solution. Although current tax law requires the larger Partnerships and S-Corporations to e-file their returns, they have asked Congress to consider expanding the e-file requirements for these business entities. John Dalrymple, IRS Deputy Commissioner of Services and Enforcement, has responded to the recommendations of the Government Accountability Office, saying the that “auditing Partnership and S-Corporation returns remains a priority for the IRS given the increased filing activity in this area.”
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