The IRS recently released its enforcement results for 2011. Based on a number of conversations with senior IRS officials, reviewing the statistics and what we are seeing first hand in our tax controversy practice at alliantgroup – one trend is clear (and will be continuing) — that the IRS is focusing greater resources on small and medium businesses. However, it is important for these businesses to recognize what the large corporations already know – it often pays to fight the tax man. The IRS is reducing audits on households below 200k and shifting the focus to taxpayers with income over 200k and especially those with over income over $1 million. For example, audits of the over one million crowd went from 14,187 in 2006 to 36,422 in 2011 – resulting in a coverage rate of 12.48% of all filers. Similarly, for taxpayers over 200k in income the number of exams has gone from 87,558 in 2006 to 174,854 for 2011 for a coverage rate of just under 4%. The story is somewhat different for corporations – with IRS audit focus shifting from larger corporations and concentrating more on small and medium corporations ($10 million to $250 million in assets). In fairness to the IRS, some of this shift is due to the IRS reaching pre-filing agreements with large business taxpayers. Looking at the last four years (2008-2011 — and this reflects where the IRS is trending) – there you see: Corporations with asset size $10 – $50 million – audit coverage has gone from 11.7% to 13.3%; Corporations with asset size $50 – $100 million – audit coverage has gone from 11.7% to 18.9%; Corporations with asset size $100 – $250 million – audit coverage has gone from 12.8% to 16.6%; Corporations with assets over $250 million – audit coverage has gone from 27.4% to 27.6%.At the same time, audits of S Corps and Partnerships have gone up in raw numbers but given the significant increase in S Corps and Partnership filings – the coverage rate has stayed roughly the same – about 0.40%. It should be noted that a significant amount of the individual audits are what are termed “correspondence” audits (gotta letter in the mail). However, the number of in-person audits — “field” audits (who’s that knocking on my door?) has jumped in recent years. Why the IRS emphasis on small and medium businesses? A number of reasons – but two that stand out: first, Washington has rung the bell on the “tax gap” – that there are billions of dollars in uncollected taxes out there (no, not just in Greece). The IRS’ latest analysis says that ground zero for the tax gap is unreported or underreported business income (and more specifically small and medium businesses being the problem in this view).