Two types of returns where the IRS has clearly dropped the ball is in the exam rate of S corporations and partnership returns. It only audited .4% and .5% respectively of those returns. As a practitioner who has represented taxpayers for many decades, I can assure that just because a businessperson incorporates or forms a partnership their level of honesty does not suddenly rise. I have found that S corporations and partnership engage in the same types of noncompliant behaviors as sole proprietorships. There is no justification for the exam rates for sole proprietorships to be 5 times that for S corporations and partnerships.

Congress Must Like Tax Cheats

Congress has chosen to empower the least compliant taxpayers at the expense of compliant taxpayers. Each year since 2010 Congress has cut the IRS enforcement budget with a resultant reduction in the examination rate. The revenue from IRS examinations has dropped by about 10 times the savings from budget cuts. The cuts have resulted in a net loss of over $5 billion in 2015. Compliant taxpayers meanwhile continue to pay their proper taxes while those who game the system have the security of knowing that the IRS is unlikely to catch on to their game.