Audits of Small Businesses – A Waste of Time

Good news and bad news for those businesses that are S Corporations.  First the bad news- the amount of IRS Audits involving S Corporations has increased in recent years.  The good news-  a recent report by the Treasury Inspector General for Tax Administration (TIGTA) revealed that over 60 percent of S Corporation audits selected by the Discriminant Index Function (DIF) were closed with no recommended changes.  Historically, the no-change close for DIF audits is less than 50 percent; however, that figure has been steadily rising.  So if you are unlucky enough to be selected for audit, there is a good chance that the Service won’t find much. The DIF system utilizes mathematical formulas to calculate and assign an audit potential score to returns.

Although the no-change rate in 2011 is higher than in prior years, the TIGTA did recognize the difficulty of S-Corp audits. A no-change audit result is considered unproductive by the IRS, as it is not a constructive use of IRS resources while also placing an undue audit burden on compliant taxpayers.

The TIGTA ( is the chief watchdog for the IRS, serving as an independent oversight of IRS activities that is committed to the prevention and detection of fraud, waste, and abuse within the IRS and related entities.

The report recommends that the criteria for DIF selected audits should be modified, and the IRS should consider using data files to identify more productive tax return audits. The DIF / DIF-Related audits have the highest no-change rate of all selected statistical categories which warrant an IRS audit, leading researchers to believe an alternative selection method may be more appropriate going forward.

For advice and guidance on how to respond to an IRS audit, or for small business tax services, contact Jesse T. Singer (Tax Principal at Cowheard, Singer & Company, P.A.) at