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IRS
October 16 2017

IRS Exam Staffing Falls – Audit Coverage Declines

Audit Advice, News Letters

IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.

Staffing

“Examination is a vitally important aspect of maintaining a voluntary tax compliance system because 85 percent of the Gross Tax Gap is comprised of underreported tax on timely filed returns,” TIGTA reported. Although hiring increased in FY 2016, it did not make up for recent attrition and retirements, TIGTA found. Examination staffing in FY 2016 reached a 20-year low with 8,847 employees, a decrease of four percent from FY 2015 (9,189 employees) and 23 percent lower than FY 2012 (11,432 employees).

Overall, the number of IRS full-time employees has declined by some 14 percent since FY 2012. The decline in the number of employees is likely to continue, TIGTA predicted. Approximately 22 percent of full-time permanent employees in the IRS are eligible to retire, and the IRS expects this number to increase to 34 percent by 2019, TIGTA found. “Should this loss of staffing be realized, the gap created by the loss of knowledge and experience has the potential to materially affect the administration and enforcement of tax laws,” TIGTA reported.

Audit coverage

Individuals. TIGTA reported that the IRS examined one of every 143 individual income tax returns in FY 2016. This reflected a 16 percent decline compared to FY 2015 and 30 percent fewer examinations than the five-year high reported in FY 2012. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, is a decline of 29 percent compared to FY 2015.

Corporations and S corps. TIGTA found that fewer corporate tax returns were examined during FY 2016 than any year since FY 2004. The number of S corp examinations fell 15 percent from FY 2015 to FY 2016 (one in every 295 S corp returns in FY 2016 compared to one in every 248 S corp returns in FY 2015).

Partnerships. Partnership examinations also declined, TIGTA found. The number of partnership returns examined decreased 24 percent from FY 2015 to 14,645 in FY 2016. “Due to a focus on partnership examinations in FY 2015, one of every 196 returns filed were examined; however, this number decreased to one of every 263 returns being examined in FY 2016,” TIGTA reported.

TIGTA Ref. No. 2017-30-072

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Deanna Ramsey, CPA, LLC | 205 Frankfort St., Versailles, KY 40383
Copyright Deanna Ramsey, CPA, LLC 2017. All right reserved.
New Business Law

Greetings, and I hope all is well. I am reaching out to you today to ensure you are aware of certain tax laws that affect pass-through entities in the Commonwealth of Kentucky. You may elect on an annual basis to pay Kentucky income tax and expense those taxes at the entity or business level, which could provide tax savings to you on your personal tax return. Under existing law, a “pass-through entity” (PTE) includes any partnership, S corporation, limited liability company, limited liability partnership, limited partnership, or similar entity recognized by the laws of Kentucky that is not taxed for federal purposes at the entity-level, but instead passes to its owners their proportionate share of income, deductions, gains, losses, credits, and similar attributes.

 

Electing to pay Kentucky income tax at the business level is optional and must be done each tax year on KY Form 740-PTET, along with making the requisite estimated tax payments using KY Form 740-PTET-ES. The electing entity may be subject to penalties if the estimated tax payments are not made timely and correctly. An election to pay estimated payments through the business entity for a particular tax year is binding for all entity owners for the entire tax year. An election for a year is only for a single year and subsequent elections must be made each year you wish to pay Kentucky income tax at the entity level.

 

Owners of electing entities are entitled to a refundable credit against Kentucky’s individual income tax equal to 100% of their proportionate share of the tax paid by the electing entity. The entity must report to each owner the owner’s proportionate share of tax paid for the taxable year. This provision prevents double taxation at both the entity and owner levels, allowing the business to pay and expense the taxes, thereby no longer recognizing them as an Owner’s Draw.

 

We encourage you to contact us to discuss how this applies to you and to address any questions you may have about your specific tax situation, or if you require assistance with calculating your estimated tax payments. We are here to help you navigate these requirements and ensure your business remains compliant.