WASHINGTON, July 25 The U.S. Internal Revenue
Service's watchdog criticized the agency for doing a high number
of small business, "S-corporation" audits without finding
additional taxes owed.
Treasury Inspector General for Tax Administration Russell
George, chief watchdog for the IRS, said on Tuesday the findings
were troubling because they may show "the agency is spending a
significant amount of resources on unproductive audits."
S-corps are flow-through company structures in which profits
go directly to the owners, who pay income taxes on them. In
C-corporations, which include most publicly traded businesses,
profits are taxed twice, first as corporate income and again as
income to investors who get dividends.
Since the 1986 tax code reform widened the differential
between individual and corporate tax rates, the S-corp set-up
has become increasingly popular among U.S. businesses, along
with other flow-through structures.
More than 98 percent of all S-corps have $10 million or less
in assets, according to George's group, known as TIGTA.
In a sample of S-corps of that size, George's unit found for
the fiscal year ended Sept. 30 that 62 percent of audits were
completed without any recommendation of tax changes.
It was unclear how much money in additional taxes was
collected as a result of S-corp audits, TIGTA said,
acknowledging that S-corp audits can be tricky.
Still, the group recommended, the IRS should do better at
scrutinizing S-corp filings to uncover owed taxes.
The IRS, in a letter acknowledging the TIGTA report, said it
agreed with the watchdog's recommendations.
S-corp tax returns have surged in recent years, even as
C-corp returns have plummeted in number. S-corps will file
nearly 5.7 million returns in 2015, up 26 percent from 2011, IRS
Democratic President Barack Obama has expressed interest in
possibly taxing S-corps as C-corps, though Republicans have
balked at this idea.
(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh
and Tim Dobbyn)