Private companies – whether organized as corporations, partnerships, or limited liability companies (LLCs) – are typically focused on growing profits, expanding the business footprints, and increasing shareholder values.  Given this focus on growth, a company’s CFO or business owner is frequently caught off guard when the IRS decides to audit the business.  The likelihood of an audit for these types of companies just increased.

In prepared remarks last month, IRS Deputy Commissioner, Service and Enforcement, Stephen T. Miller, talked candidly about the near term enforcement objectives of the IRS.  He specifically identified an increase in audits targeted at international businesses, middle market companies, and flow-through entities.

In the wake of the IRS’s successful foray into improving the international compliance of foreign accounts and foreign financial assets, Mr. Miller indicated that the IRS would continue to hire agents to specifically target for audit businesses with international operations.  To illustrate, in 2001, the IRS had 3,762 revenue agents in domestic operations.  The IRS had zero agents in Global High Wealth and thirteen agents in international operations.  Ten years later, as of last year, the IRS had reduced the number of agents in domestic operations to 2,867.  It has hired 71 agents for the Global High Wealth group, and 856 agents in the international operations group.  The IRS intends to target businesses that conduct international operations regardless of the size of the business.

Mr. Miller also identified middle market companies as a target for the IRS.  He defined middle markets to include companies and partnerships with assets between $10,000,000 and $250,000,000.  The current IRS audit rate for these types of companies is about 11.9%.  The IRS’s stated goal is to increase this number significantly because he believes that many mid-market businesses have the same or additional issues as larger entities.

The IRS will also target flow-through entities in the next few years.  In response to the increased use of partnerships and LLCs, the IRS intends to send more audit notices to these entities.  The flexibility of flow-through entities can result in inexperienced taxpayers making tax mistakes and experienced taxpayers taking calculated tax risks – both potential areas of interest for the IRS.

Given this recent announcement, now is the time for businesses conducting international operations, middle market companies, and flow-through entities to perform some internal tax due diligence to ensure that they are reporting accurately to the IRS.  The IRS has clearly signaled to CFOs and business owners that it intends to be more aggressive in these areas.  The announcement is also an opportunity for middle market companies and flow-through entities to ensure that their corporate or entity formalities have been followed.  A failure to follow these formalities could yield personal liability for business owners.