IRS Needs Help to Improve Small-Business Audits, Official Says

Admitting that it needs help in auditing small businesses, an Internal Revenue Service commissioner says it's sharpening its focus on partnerships.
Kathy HoffelderNovember 5, 2013

Contrary to what many small-business owners and CFOs may think, the Internal Revenue Service’s audit programs are not designed to give “nightmares” but to create less of them, Faris Fink, an IRS commissioner, said at an American Institute of Certified Public Accountants tax conference Tuesday. Fink acknowledged that the service could use help in its small-business audits.

75px-US-InternalRevenueService-Seal.svgFink, who represents the Small Business/Self-Employed Division of the IRS, said the IRS has designed its research and other compliance programs to help weed out unwarranted audits of small businesses. For example, data collected from the service’s National Research Program (NRP) is helping to educate IRS staff and improve their “selection criteria” when it comes to auditing company returns. In that way, the NRP can help IRS small-business auditors do a better job of selecting which returns have the potential to have some problems, he said.

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The NRP has been helping Fink’s division delve into areas the IRS hasn’t looked into for decades, such as fuel-tax-reporting compliance. For that project, which began in July 2012, the IRS is looking at over 1,000 tax returns, said Fink, with 600 of those returns in the field right now for examination.

“The examination is far more invasive than what we have done in the past,” he added. The IRS’s small-business NRP representatives  check company returns going back one year, while the NRP reps for large firms look back five years.

But fuel tax isn’t the only program aimed at helping IRS staff to figure out the workings of small businesses. Fink’s group underwent a series of virtual training sessions last year on how partnerships work. The IRS began its new partnership curriculum after realizing that the influx of staff hires in recent years did not have sufficient training around partnerships, and auditing partnerships, in particular. (Fink did not say who provided the virtual training.)

“We have not en masse done that type of training virtually ever as an agency. We just haven’t,” he said, noting that some questions still remain over its effectiveness.

But understanding how to audit partnerships “will be a point of emphasis for the next twelve months and, I guarantee you, beyond that,” added Fink. “We’ve got to develop a short-term and long term training plan to put the right tools in our examiners’ hands so they are more capable and better at looking at flow-throughs and particularly partnerships.”

The partnership training, according to Fink, is important for the growth of IRS agents themselves. “We’ve got to increase or enhance those skill sets to be effective. We’ve got to be better at identifying technical issues and auditing technical issues,” he said.  The private sector, Fink acknowledged, has skills in the virtual training area that IRS agents do not have.

“It’s going to be challenging,” he said, “as we grow this initiative.” The IRS’ large business and international division is also involved in the training along with the small business unit, with both groups sharing information.

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