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IRS Targets Small Businesses with New Audits

You may be aware that the IRS has previously announced a program to randomly audit 5,000 S-corporations. These are small corporations where the corporate profits are taxed at the shareholder level, not the corporate level, thus avoiding the double taxation of dividends.

You should also know what I learned this morning from the U.S. Chamber of Commerce. The IRS is currently engaged in two unannounced audit programs that also target small businesses for audit.

The first of the unannounced audit programs selects S-corporations in their first and second years of operation. In addition, in the second unannounced program, individual returns where there are W-2 wages and Schedule C losses will also be selected for audit. The IRS claims that they want to make sure that new businesses are properly complying with tax law from the beginning.

This sounds like the old joke where the punchline is ". . . we are from the government and we are here to help you!" It certainly would be better for new businesses to meet with IRS education and communications specialists rather than IRS auditors.

The U.S. Chamber of Commerce's Small Business Council brought this issue before the House Small Business Committee yesterday. Hopefully lawmakers will exert some influence over the IRS. At this point, however, if you own an S-corporation in its first or second year of business or run a partnership, sole proprietorship or LLC and have taken or will take losses against other income on your personal return, you may be at an increased risk for audit.

You and your tax preparer should make sure that the i's are dotted, the t's are crossed and every dollar is properly accounted for.

Likewise, if you know of someone that has recently started a business, you may want to alert them to these new unannounced IRS audit programs. Please feel free to forward this email to anyone you believe may be interested. You can also invite friends and colleagues to subscribe to LegalBriefs. All they need to do is send an email to

If you have any questions about this or any other business law issue, please do not hesitate to call me at 541-345-2325 or send an email to

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