Audits: A Tough Year For SMB

By Laura Messerschmitt, Outright VP of Marketing

It’s what every small business owner dreads – an IRS audit.  Yet, more of our nation’s small businesses are going to be faced with audits in the coming year according to new guidelines released by the IRS. 

For the IRS, the main purpose of doing audits is to reduce the tax gap.  The “tax gap” is the amount of taxes that go uncollected because of the underreporting of income.   The IRS believes that small businesses account for 84% of the $450 billion of this gap.  Based on the 2013 audit guidelines released recently, the IRS will be focusing on small businesses to try and catch businesses who are underreporting their income.            

While there are eight areas of focus that the IRS has declared for this year, there are really two key changes that all small businesses should pay particular attention to.  First, audits on sole proprietors and LLCs who make over $1MM in annual revenues will see increased audits.   Last year, the IRS audited a full 12.5% of these small businesses and that percentage is expected to go up.  If you fall into this segment, it will be critically important that you keep good records and have a bookkeeping system` in place, so that you can adequately respond to any audits that you might face.

The other change that has the potential to have a broad-reaching effect across all small businesses is a new pilot program that the IRS is putting into place that will audit small businesses based on their 1099-Ks.  The 1099-K is a form that small businesses who take credit cards may receive from their credit card processor or third party payment network.  The IRS will also receive a copy of this form.   The IRS estimates that 53 million of these forms will be sent out.

In a pilot program for this year, the IRS will be comparing the amount of revenue reported on the 1099-K with the amount that the small business reports.  Those small businesses whose returns do not match the 1099-K form will have a higher risk of being audited.  This makes it absolutely critical for small businesses to double check that they are reporting all of the income included on their 1099-K forms.    

While nobody likes to think about or prepare themselves for an audit, small businesses should be thoughtful this year with their taxes so that they can be prepared for their increased audit risk this year.