The IRS Magnet

The smaller the business, the more likely it is to be audited by the U.S. Internal Revenue Service. That's according to the most recent edition of the Kiplinger Letter (requires subscription):

"Small proprietorships are the most likely to hear from the IRS. Questionable deductions by many firms with gross receipts under $25,000 hike their audit rate to 3%, triple the rate for all firms.



Self-employeds also get examined more often than most taxpayers. Their 1.9% audit rate is three times the rate for other individuals."

But then there is this report by bcentral.com, suggesting that small businesses have never had it so good with the IRS:

"Audit rates for small businesses plummeted in the 1990s. In 1997, the IRS audited more than 4% of all sole proprietors with total gross revenues of at least $100,000; by 1999 that figure was down around 2.4%. The audit rate for sole proprietors with total gross receipts of $25,000 to $99,999 fell to 1.3%.



Quite simply, the audit rate has pretty much reached the point where there is nowhere to go but up."

I'm not sure how to reconcile these two reports. Perhaps they are perfectly consistent, inasmuch as they focus on different size levels within the small business segment.



But there is one trend everyone seems to agree upon: in the future, the IRS will be conducting more audits on American small businesses. The IRS has restructured and is hiring 2,200 new auditors in part to focus on enforcement efforts with small business. Somehow I am not surprised, given the significant role that small business is playing in driving the U.S. economy.