IRS ramps up for tax season

JEFFREY T. LAVERY

Rising incidents of non-compliance have prompted the IRS to beef up hiring for field agents.

One of the targets that the IRS has its sights set on is S-Corporations, defined as those corporations with no more than 75 shareholders.  The IRS has taken a close look at growing issues of non-compliance among S-Corps, a problem stemming from complex tax laws and lower revenues among startups.

If the increase in IRS hires is any indication, business tactics like these will soon catch up with S-Corp. owners.  Nationwide, IRS offices will see an employment boost by as many as 800 new recruits this tax season.

For many small businesses, forming an S-Corp. is an appealing alternative to becoming a full-fledged corporation due to the tax advantages, such as reporting business income on the owner’s personal income tax form.

However, with direct orders from the IRS Commissioner Mark Everson to cut down on the number of non-compliance cases, notices of job openings at field offices in Worcester and Southboro appeared earlier this year.

"The commissioner would like to see an increase in audits and compliance," says Peggy Riley, media relations specialist with the IRS in Boston.  "We are now hiring more compliance employees to help fulfill the initiative he has set out."

Among small businesses, the IRS estimates that on returns collected in 2001, only 57 percent reported their business income.

"Currently, the IRS is concentrating on S-corporations," says Bill Philbrick, senior vice president of the Worcester accounting firm of Greenberg, Rosenblatt, Kull & Bitsoli.  "People who have never gotten a visit from the IRS may get one."

Audits on the rise

Audits of small businesses organized as corporations spiked in 2005, with 17,6887 completed in 2005 versus 7,294 in2004, according to IRS research.  Riley notes the need for audit officers extends beyond other IRS positions, with a rolling process for revenue agent hires through September.

Still, despite the increase in cases and agents, getting audited comes down to the luck of the draw.  "A lot of the audits are chosen randomly by the computers, but we also have special projects, where we take a look at certain industries," says Riley.  For example, a special project may focus on retail businesses that deal strictly in cash.

In addition to failing to report income, there are several other pitfalls for small businesses to avoid.  One example is a misuse of the home when used as a business.  "You can’t have the kids downloading music on a computer used for business," says Riley.

The IRS imposes a number of fines and punishments for those corporations in violation of tax laws.  These include civil actions, such as tax liens against taxpayer-owned property.  Worse yet, investigations by the IRS Criminal Investigation taskforce can lead to convictions and jail terms.

While the practice of failing to report business income and writing oneself off the payroll may be nothing more than an oversight, the fledgling company owner should be prepared, accountants warn.  "It might be bad habits that developed," say Philbrick.  "For years, nobody came looking to enforce the laws."

Philbrick emphasizes that companies need to keep good records, so that every purchase or deduction can be substantiated if an audit does occur.  Further, an accounting system that meets the needs of the company will help better manage the company’s finances.

"It comes down to planning, and having records to back up your finances," Philbrick notes.  "Failure to keep good records will croak you every time."

Jeffrey T. Lavery can be reached at jtlavery@wjbournal.com