Advising Tax Clients to Form S Corporations to Lessen Chance of IRS Audit
It is usual for business proprietors and their consultants to give thought to which kind of business to choose because of the high possibility of being examined by the IRS. This is borne out by the audit statistics (schedule C) returns provided by the IRS. The statistics show the IRS doesn’t audit S Corporations as much.
However, there are some individuals who are saying it appears to be an infringement of Circular 230 if a tax consultant informs a taxpayer to manage within the S Corporation kind of business due to fewer audits than sole proprietorship.
This comes as a complete surprise because if you carry out a simple online search it reveals a long list of tax consultancies telling taxpayers to do just that so they can avoid an IRS audit.
If you investigate further, you will find no trace of such an IRS rule. If you carefully scrutinize Circular 230 and also the AICP Standards of Tax Services there is nothing about such an infringement. It is not going against the grain or unethical for tax consultants to tell taxpayers to incorporate so they have little chance of an IRS audit. Those who do are simply telling their clients the truth.
There are good reasons for a business owner to opt for fewer audits. An IRS audit is known to be nerve-racking, distracting and it entails the revelation of personal and sensitive data. An IRS audit takes up a great deal of time that many businesses want to avoid. These are all very reasonable considerations that show not every business that wants to avoid an IRS audit is out to hide an underhand act.
