Small Businesses in Virginia Could Soon Be Facing More IRS Scrutiny

Small businesses have always faced audit risks, but a recent development at the Internal Revenue Service (IRS) means that small businesses could soon be facing enhanced scrutiny of their federal returns. On March 5, the IRS announced that its Small Business/Self Employed Division is opening a new Fraud Enforcement Office that will specifically be targeting small businesses that underreport and underpay their federal tax liability. The Fraud Enforcement Office is beginning operations in 2020.

With this in mind, small business owners in Virginia must ensure that their federal income tax filings are up to date, and they must be confident that their past filings adequately reflect their taxable income and tax liability. Small business owners who have concerns should consult with a Virginia business tax attorney promptly.

10 Issues that May Trigger an IRS Fraud Enforcement Office Audit or Investigation

What types of issues are likely to garner the attention of the IRS’s new Fraud Enforcement Office? Generally speaking, the Fraud Enforcement Office will be supplementing the IRS’s existing enforcement efforts, which means that it will likely be targeting allegations such as:

• Failure to File Federal Returns – Failure to file quarterly or annual returns is an easy “red flag” for agents in the Small Business/Self Employed Division’s Fraud Enforcement Office.
• Failure to Report Taxable Income – Just like individuals, small businesses have an obligation to report all taxable income from all sources on their annual returns.
• Misclassification of Taxable Income – Classifying ordinary income as capital gains in order to avoid or mitigate federal income tax liability is considered a form of tax evasion.
• Claiming Fraudulent Business Deductions – Fraudulently claiming business deductions in order to reduce federal income tax liability is a common issue, and IRS agents are trained to spot suspect deductions.
• Claiming Business Deductions for Personal Expenses – Claiming personal expenses as business deductions is another common issue that often gets small businesses and their owners into trouble with the IRS.
• Claiming Fraudulent Losses – In addition to claiming fraudulent deductions, claiming fraudulent losses is a form of tax fraud that can lead to civil or criminal penalties.
• Diverting Business Income for Personal Use – Diverting business income for personal use and not reporting the income on the business’s returns is a dangerous practice that can lead to steep penalties.   
• Attempting to Conceal Assets or Income – Attempting to conceal assets and income is also a common tax evasion tactic with which IRS agents in the Small Business/Self Employed Division are intimately familiar.
• Falsifying the Company’s Accounting Records – Falsifying the company’s books and records in order to substantiate fraudulent tax returns is an issue that FBI agents can uncover during audits and investigations.
• Creating Abusive Tax Shelters – Abusive tax shelters that impermissibly shield income from the IRS can lead to trouble even if the business owner unknowingly sets up an illegal shelter on the advice of a third-party “promoter.”

Consult with a Virginia Business Tax Attorney

Are you concerned that past activity could lead to an audit or investigation of your small business? To discuss your situation with Virginia business tax attorney Kevin E. Thorn, Managing Partner  at Thorn Law Group in confidence, email ket@thornlawgroup.com, call 703-752-3752 or contact us online now.