CCH Tax Day Report
The House Small Business Committee held a hearing on September 14 on IRS examination procedures for small businesses. The committee and witnesses discussed the need for clarity and focus with regard to the IRS examination process of small businesses, as well as the high rates with which small businesses are audited compared to corporations.
“Our current system is working against these small businesses, when it should be working for them,” Chairman Steve Chabot, R-Ohio, said during opening statements. “The IRS has an obligation to provide small businesses with clarity and to treat all taxpayers with respect.”
Kathy Petronchak, director of IRS Practice and Procedure at alliantgroup, LP, and former IRS employee of the Small Business/Self-Employed Division (SB/SE), testified on a number of ways the IRS could better serve small businesses throughout the audit process. “If there is one takeaway from my message today, it is that IRS practices and procedures during the examination of small businesses need to improve, and perhaps improve dramatically,” Petronchak said.
Petronchak outlined specific areas in which IRS improvement was needed, which included the information document request (IDRs) process, alternative dispute resolution, expert assistance, appeals and third-party contacts. Petronchak suggested the IRS adopt some of the more detailed, organized audit procedures utilized for big businesses through the Large Business and International (LB&I) Division, stating that doing so would improve transparency in IRS examination of small businesses. As for IDRs, for example, “there are only loose guidelines on issuing IDRs…which provide little focus on how to work transparently and collaboratively,” according to Petronchak.
Unlike LB&I, SB/SE “does not have a public “Examination Process” statement whereby the division provides an organizational approach for examinations from the first contact through the final stages of issue resolutions,” Jennifer E. Breen testified on behalf of the American Bar Association Section of Taxation. Additionally, LB&I agents are required to ensure that IDRs are “issue focused” and have been discussed with the taxpayer prior to issuance or determination of a mandatory response date, according to Petronchak.
Donald T. Williamson, tax professor and fellow executive director, Kogod Tax Policy Center, testified that the “highest number of audits for 2014 of individual tax returns with business income was in the lowest range of business returns, i.e. $200,000 to $400,000, amounting to 50 percent of all audits of upper-income individual returns.” The odds of a Schedule C business being audited are nearly twice as great as a small corporation being audited, Williamson said. “This evidence seemingly indicates that small proprietorships are in the audit crosshairs.”
By Jessica Jeane, Wolters Kluwer News Staff
Statement of Kathy Petronchak, Director – IRS Practice and Procedure, alliantgroup, LP
Statement of Warren Hudak, EA, CPA, President, Hudak & Company
Testimony of Donald T. Williamson Kogod, Eminent Professor of Taxation, Howard S. Dvorkin Faculty Fellow, Executive Director, Kogod Tax Policy Center Kogod School of Business American University
Statement of Jennifer E. Breen on Behalf of the American Bar Association Section of Taxation