What Entities will the IRS be targeting for tax year 2014 and 2015? The GAO says that since FY 2010, IRS has lost 10,000 employees and had its budget cut by $900 million. More cuts are proposed for the 2015 IRS budget. Identity theft issues, foreign asset reporting, and Affordable Care Act (ACA) responsibilities will continue to absorb personnel and resources. This budget reality will hamper IRS audit goals, but there are still many audit targets that you will want to discuss or disclose with your business clients in the next few months.

High Income Taxpayer and their Entities. The rich, high-income taxpayers will continue to receive audit attention (at about a 9% rate for those reporting income of $1 million to $5 million). Since these taxpayers returns with income and losses from many flow-through entities, the audit of the owner will often lead to an expansion of the IRS examination into various entities.

Employee Taxes. Employment taxes is one of the main focus this year, and this includes a continuing look by the IRS for the following:

1. Employee versus independent contractor,

2. Form 1099 compliance, and

3. S corporation reasonable compensation issues.

Please keep in mind that when the ACA's employer mandate takes effect in 2015 and 2016, the employee versus independent contractor determination will become more important. Employer ACA penalties can be up to $3,000 for each unclassified employee.

Partnership Tax Returns. Partnerships are the fastest growing segment of all tax returns filed. The IRS hopes to expand its audits for partnership and LLC (Limited Liability Company) returns. Flow-through losses from developers and real estate investors will get special attention. The audit rate of partnerships and LLCs was a dismal .42% for FY 2013. IRS conducted special training this year to increase the number of auditors with a specialized knowledge in partnership law.

Cash Basis Businesses. The tax gap remains a hot item, so cash-intensive businesses will receive a little more attention from the IRS. The IRS is using Form 1099-K to help and assist in selecting some of these businesses for audit.

Electronic Records. One more to consider on business audits. 94(ninety-four) percent of small businesses is using QuickBooks for accounting purposes, but the IRS does not have the budget to update its Quickbooks software yearly and is unable to accept electronic records from many of the small businesses for its auditing purpose. Without access to electronic records, the audit will be less efficient.