The IRS hasn't focused on S corporation audits in 21 years, and needs to update its data so that it can tweak its audit machinery to select audits more effectively. Therefore, they plan to select 5,000 S corporations for random audits under the National Research Program.
The owners of small businesses, many of which operate as S corporations, are convinced that this amounts to an unfair burden.
Although some observers see this as a rock and a hard spot situation, I believe there are intermediate grounds that could meet the needs of the IRS while causing much less anxiety and pain to the small businesses community. In the same spirit that Rush Limbaugh offered himself as an honest broker to smooth out the differences between Terrell Owens and Donovan McNabb (an offer which was ignored), I offer my services to bring together these two essential elements of American capitalism--those who make the money and those who collect the taxes.
Advocates for small business point out that audits under the National Research Program are not your ordinary audits--they're an outgrowth of the old Taxpayer Compliance Measurement Program audits, which terrorized taxpayers for over 30 years with onerous, line-by-line audits of their returns.
However, the IRS says that the newer NRP audits are aimed at being less intrusive than previous compliance studies, and will help reduce the audits of taxpayers who file accurately by providing the IRS with a road map for planning future audits. They will do this by helping avoid audits of compliant returns, which are unnecessary and burdensome for taxpayers and costly for the IRS.
Both sides have a point.
But what if the IRS could get the information it says it needs without putting 5,000 small business owners through the pain and suffering of a "research" audit?
An intensive survey might ask the right questions, but it is doubtful that respondents would feel compelled to answer truthfully, if at all. More compelling than a survey, but less anxiety-inducing than a true audit, would be an audit without penalties. The randomly selected taxpayer would voluntarily submit to an intensive scrutiny of his 2003 and 2004 returns with the comforting knowledge that his business and house are not up for grabs by the government. The IRS would get the data it needs, which is the primary motive for the audits, not the resulting increases in tax liability.
As an alternative, the IRS could privatize the matter by using an outside research team to perform the audits, with the cost subsidized on a percentage basis by taxpayers who end up owing something. In exchange for voluntarily coming forward with information, they would agree beforehand to pay a percentage of what they might owe to cover the costs of the outside contractor. Taxpayers who declined such an offer would find themselves subject to an official IRS audit, with all the scrutiny it involves.
My guess is they would choose the private contractor.
