Historically, S corporations and partnerships have faced lower audit rates than sole proprietors (who report income and expenses on a Schedule C with their personal tax returns) and regular C corporations. Here are the audit rates from the 2011 tax year:
- Schedule C (by gross receipts)
- $0 – $24,999 1.3%
- $25,000 – $99,999 2.9%
- $100,000+ 4.1%
- C Corporation (Form 1120) 1.5%
- S Corporation (Form 1120S) 0.4%
- Partnerships (Form 1065) 0.4%
The IRS has announced that it will be shifting its focus away from regular corporations to pass-through entities (S corps and partnerships) where the IRS thinks a larger amount of underpaid taxes will be discovered. Accordingly, it is allocating more resources to training examiners about issues commonly encountered with pass-through tax returns.
I would recommend talking to your tax preparer about how to minimize your specific audit risks.