Small business not IRS target, House panel hears

NEW YORK (AP) — The IRS has not targeted small businesses for audits for political reasons and has kept the number of small business returns that it scrutinizes relatively stable, the agency's acting head told a House committee hearing Wednesday.

Members of the House Small Business Committee asked Daniel Werfel, who became acting IRS commissioner two months ago, whether small businesses were targeted for audits as conservative nonprofits groups have been.

"I have no evidence at my disposal of any similar type of targeting," he said.

Werfel became acting commissioner May 16, after Treasury Inspector General for Tax Administration J. Russell George reported that IRS employees had improperly targeted conservative groups for additional scrutiny when they applied for tax-exempt status during the 2010 and 2012 elections. Most of the agency's leadership was replaced following the report.

Two weeks after Werfel's appointment, House Small Business Committee Chairman Sam Graves, R-Mo., sent a letter to Werfel, asking whether returns of small businesses were selected for closer scrutiny during the past three years.

The audit rate for small businesses has remained relatively constant in recent years, Werfel told the committee. He said that in the fiscal year 2012, which ended Sept. 30, the IRS audited about 1.7 million returns, 21 percent of them small-business returns. In fiscal 2011, 22 percent of audits were of small-business returns, and in 2010, the figure was 21 percent.

In 2012, 1.3 percent of the small-business returns were audited, Werfel said.

Werfel explained to the committee the process by which returns are selected for audit. Computers are used to assign a score to each return based on whether the return appears to in compliance with tax laws. A higher score indicates that there is a greater probability that an audit would result in a filer having to pay additional tax. Audits can also be triggered when there is a discrepancy between the information on a return and on tax forms provided by other filers — for example, a 1099 form issued by someone who hires a freelancer.

Werfel also said that the agency continually looks for ways to improve its audit-selection process, with an eye toward finding returns that do not comply with tax laws, and which therefore would yield more tax revenue upon closer examination.

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