[IMGCAP(1)]I think most people would agree that the IRS faces some significant challenges going forward. Issues such as having to implement and administer complex provisions associated with the Affordable Care Act will cause the organization to redirect its efforts to meet its core priorities -- service and compliance enforcement. A change in compliance enforcement could significantly impact middle-market taxpayers. With that said, it is critical that middle-market taxpayers are aware of and prepared for this potential impact.
There is little doubt that midsized businesses are currently in the middle of a “perfect storm” at the IRS -- the service has taken a new approach to addressing current compliance challenges and announced a shift in focus from Fortune 1000 companies toward middle-market businesses. Midsized companies must become better educated on audit procedure and be prepared to consider the implications of these approaching changes at the IRS.
The IRS Large Business International Division, where I was a senior-level executive, is leading the shift toward the middle market. The LB&I Division is responsible for tax administration and compliance audits for large businesses, such as Fortune 1000 companies, which includes firms with assets of $10 million and greater. Therefore it is responsible for business entities considered to be midsized, with assets generally ranging from $10 million to $100 million. Thus, a company with assets measuring up to $100 million could be classified as a midsized business taxpayer. Limited resources and the historical Fortune 1000 focus have lead to lighter middle-market coverage in the past, but now attention, resources and expertise are being shifted to the middle market sector. This means that more middle-market businesses will be audited.
It has long been understood that smaller companies received fewer audit resources, but with this new initiative, that understanding will rapidly change. Many middle-market taxpayers not used to being audited are likely to be facing new challenges, and IRS auditors trained to evaluate the Fortune 1000 will have to retool to understand the practices of middle-market businesses.
In order to refocus examination compliance activity (and due to limited resources), some IRS examiners will need to be moved away from the largest audits of Fortune 1000 global companies. These audits are generally more desirable to examiners primarily due to the sheer size and complexity of the potential issues that are often associated with these examinations. However, what many may not know is that much of the same complexity exists for mid-market tax circumstances as well. Furthermore, many veteran large-case examiners who are re-assigned to middle-market examinations may be challenged by the differing business practices, and even by the scale of issues that are common to midsized but not Fortune 1000-sized companies. Even more unusual to these auditors is the fact that many in this sector do not have in-house tax counselors, or even a thorough knowledge and understanding of their rights under the quality exam process and the law.
Up until now, IRS audit coverage for mid-market business taxpayers has been roughly 11.9 percent, according to former Acting IRS Commissioner Steven Miller, but it is believed that many mid-market corporations may have the same issues as larger entities, and perhaps additional issues.
As this new compliance effort comes online, middle-market taxpayers will see an increase in audits. One question that must be addressed by all taxpayers, but particularly those in the mid-market, is what do you need to do to be prepared? Another critical question is, which audit defense resources will you utilize? The mid-market is generally less aware of IRS audit practices and procedures and may even be unaware of the audit defense resources employed by the Fortune 1000. Additionally, due to the pressure of this increased focus and potential influx of examiners with little to no experience reviewing midsized business operations, the examination process could become more of a challenging and frustrating experience for both the service and midsized taxpayers.
Walter Harris is the director of IRS practice and procedure at alliantgroup. Prior to joining alliantgroup, he served as a senior-level executive of the Internal Revenue Service from 2007 until 2012.