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Small business and tax audits, part 2: income reporting

In the first part of this post, we discussed the recent statement by a key IRS official about expected increases in the audits of small-business partnerships.

We also noted the reason why this is happening: the increased use of such partnerships, as opposed to more traditional "pass through" business forms such as sole proprietorships.

In this part of the post, let's look at how the IRS is preparing to give more focus to audits of small businesses that have taken the partnership form.

For one thing, the IRS has acknowledged that is must give its agents proper training on the complex partnership structures that many small businesses now take.

In the past, partnerships usually had only a small group of partners. Today, however, partners can be extremely numerous and range across multiple tiers.

Of course, there are many other tax issues affecting small businesses as well, besides the trend toward more use of the partnership form.

For example, as we discussed most recently in our September 4 post, many small employers are still scrambling to meet the health insurance requirements of the Affordable Care Act (ACA). The troubled rollout of the online exchanges has only underscored the need for both employers and employees to understand what their health-insurance options and obligations are.

Beyond the partnership audits we’ve discussed, there is also the much larger issue of the IRS looking more closely at possible under-reporting of income by small businesses. As we discussed in a two-part post on August 16 and 23, more IRS scrutiny in this area could become a burden for many businesses.

Source: Bloomberg, "Small-Business Partnerships to Be Prioritiy of IRS Exams: Taxes," Lydia Beyoud, Nov. 11, 2013

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