Prepare for Potential IRS Audits of Qualified Business Income Deductions

Written By: Robert E. Petrowsky

Earlier this month, the Deputy Inspector General for Audit with the U.S. Department of Treasury released a report indicating that millions of dollars in Section 199A Qualified Business Income (“QBI”) deductions had not been verified. Section 199A is relatively new and has a steep learning curve for small businesses and tax professionals alike. Based on the report, it appears that the IRS has moved past the learning curve and is well on its way to making sure these deductions are properly taken for this coming tax year. The report calls for using a “soft notice” to gently make taxpayers aware of any potential problems.
The 199A QBI deduction has allowed a major shift in the way small businesses structure wages and earnings. Within certain constraints, the business may deduct up to 20% of its qualified business income. The deduction has created a bit of a balancing act in allocating wages and income for business owners in order to receive the highest deduction possible while reducing self-employment taxes. As with most tax-related balancing acts, this can create a trap for the unwary (or careless) filers.
We all know the only two certainties in life are death and taxes, and we know the government is looking at every avenue to make sure it collects its taxes. While millions of dollars pale in comparison to the 28 trillion-dollar national debt, the IRS spent the time and resources creating the report and obviously takes the matter seriously. We would all be wise to prepare for future audits directed at filers that use the Section 199A deductions as the IRS exhausts more gentle avenues of ensuring compliance. This means if your sole proprietorship, partnership, S Corporation, trust, or estate relies on QBI deductions, it should probably spend a bit of time reviewing the deductions and related allocations with its accountant to ensure that everything is above board and fits within the most recent IRS guidance. This is one area where an ounce of prevention could certainly be worth a pound of cure.
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