The latest TIGTA (Treasury Inspector General for Tax Administration)report targets IRS audits of small, closely-held corporations. The opening lines of the report state that close corporation transactions are often structured to avoid tax compliance. The report states:
“Shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions so they reduce the income taxes owed by the corporation or the shareholders. Corporations and shareholders that take advantage of such opportunities to understate their tax liabilities can create unfair burden on honest taxpayers and diminish the public’s respect for the tax system”.
TIGTA found that audits of close corporations increased the recommended additional taxes. Among these concerns, the report stated, IRS examiners ignored or overlooked many discrepancies between the corporate return and other returns that were filed or should have been filed, such as information returns, employment tax returns, and shareholders’ individual tax returns.
National Quality Review System statistics cited in the report stated that examiners had failed to complete these required filing checks in an average of 24 percent of field examinations. Additionally, for the reporting periods between 2006 and 2010, the percentage of examiners that had not completed the filing checks had never been lower than 22 percent.
TIGTA made several recommendations:
-Examiners should take advantage of the IRS’s automated information systems to complete their checks for filed returns;
-First-line managers should continue to monitor audit performance and provide written feedback on points where examiners could improve their filing checks, while also citing specific examples of accomplishments and achievements in their reviews.