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catalinajack 11-10-2019 10:30 AM

Audits of S Corps and especially pertnerships with many partners are very resource intensive.
Quote:

Originally Posted by BandB (Post 818944)
Thank you for the clarification. I'm sure the use of trainees has changed since my one encounter with one nearly 30 years ago.

One thing I found interesting from the data is how seldom S Corporations and Partnerships are audited as they are nontaxable returns, only 2/10 of 1%. I'm sure the theory is the personal return audit covers them. Of course I do suspect larger S Corporations run a higher risk than small ones. I know of S corporations with sales over $1 Billion and Assets that would put them in the 10% audit category if a C Corporation.

When I was in industry working for someone else, our corporate returns were audited at least 10-14 times between 1989 and 2012. My wife and I own S Corporations and their return has never been audited.

Interestingly in 2018, there were math errors found on 2.5 million 2017 returns and nearly .5 million 2016 returns. Surprised me with all the computerized filing.

For anyone interested, here is the link to the IRS data book.

https://www.irs.gov/statistics/soi-t...ndex-of-tables


MYTraveler 11-10-2019 09:31 PM

Quote:

Originally Posted by catalinajack (Post 819160)
Audits of S Corps and especially pertnerships with many partners are very resource intensive.

Under the new rules the number of partners becomes irrelevant.

BandB 11-10-2019 10:21 PM

Quote:

Originally Posted by MYTraveler (Post 819411)
Under the new rules the number of partners becomes irrelevant.

I think there are a number of reasons for minimal audits of S Corps and Partnerships. Primary is that they are pass through entities, so ultimately examined at the taxpayer level. I would argue though that philosophy misses a lot on complex entities.

Another thing is that you have two basic groups of pass through entities. The first is the large number that are little more than proprietorship's, just different legal structures. Simple. The other group is that of many levels and numbers of pass through entities. I know of one S Corp that the consolidated return reflects well over 100 entities.

Then it seems individual audit frequency is based on income while business audits are based on assets. Most S Corps and Partnerships have relatively small amounts of assets so even if they were C Corporations their likelihood of audit would be slim. I would say S Corps with over $250 million of assets would be far more likely to be audited.

catalinajack 11-11-2019 03:46 AM

Quote:

Originally Posted by MYTraveler (Post 819411)
Under the new rules the number of partners becomes irrelevant.

Hardly irrelevant. A change to the taxable distribution of a partnership with 250 partners requires a change to the returns of 250 other entities. That means legal notices to 250 entities and, at the very least, 250 proposals of additional tax or adjustments to the taxable distribution of wait, another partnetship. And, those 250 entities, well, IRS may see something on the return of one or more of those entities that sparks a full audit rather than just effecting the pass-through adjustments. So, not irrelevant.

BandB 11-11-2019 10:10 AM

Quote:

Originally Posted by catalinajack (Post 819445)
Hardly irrelevant. A change to the taxable distribution of a partnership with 250 partners requires a change to the returns of 250 other entities. That means legal notices to 250 entities and, at the very least, 250 proposals of additional tax or adjustments to the taxable distribution of wait, another partnetship. And, those 250 entities, well, IRS may see something on the return of one or more of those entities that sparks a full audit rather than just effecting the pass-through adjustments. So, not irrelevant.

Very similar impact as cases where a specific shelter is used by a client of a large accounting firm. They know that if one client used this technique, then many more did so every client of that firm who did use it is now an audit candidate, at least partial for that one shelter.

Perhaps the most famous case was EY was promoting the use of four major tax shelters between 2000 and 2004. There were 4 major shelters that deferred, reduced or eliminated $2 billion in taxes for 200 EY clients. They were called COBRA, CDS, CDS Add-On, and PICO. EY agreed in 2013 finally to pay the IRS $123 million to avoid criminal prosecution although some of their partners were criminally prosecuted. Needless to EY's payout to the clients for penalties and interest incurred was huge.

These shelters were described as investment driven when, in fact, they served no purpose other than taxes. Any transaction that serves no purpose other than tax avoidance is by regulation ignored for tax purposes.

On a bit lower level there was a famous raffle by a very large Catholic Church. Tickets were $7 each. Raffle tickets are gambling, not donations. Once one purchaser was audited, it was easy to run a program for all persons with "donations" to the church divisible by 7.


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