Comparing Audit Rates Across Business Entities

• C corporations: The audit rate for C corporations varies based on their size. Small C corporations with assets under $10 million face an audit rate around 1%, while very large corporations with assets exceeding $250 million have nearly a 9% audit rate.
• Partnerships: Partnerships also have a relatively low audit rate. The IRS reports an audit rate for small partnerships around 0.05%, making them a low-risk entity from an audit perspective. Similar to S corps, the IRS plans to ramp up audits for large partnerships (assets greater than $10 million) so the rate will be closer to 1%.
• Sole Proprietorships and Single Member LLCs: Sole proprietorships and Single Member LLCs, particularly those with significant income and deductions, face a higher audit rate compared to other small business structures. The audit rate for sole proprietorships and LLCs can be as high as 3.23%. 

Why Audit Rates Matter

Understanding the audit rate of your chosen business entity is crucial for several reasons:

1. Peace of Mind: Knowing the likelihood of an audit can reduce stress and help you focus on growing your business.
2. Compliance Strategy: Businesses with higher audit rates need to be more diligent in maintaining accurate records and complying with tax laws.

Conclusion

The S corp structure offers significant advantages, including a remarkably low audit rate of 0.1%. This makes it an attractive option for small to medium-sized businesses seeking a balance of liability protection and tax efficiency. By comparing the audit rates of different entities, business owners can make more informed decisions about their business structure and tax planning strategies.

If you’re considering forming an S corp or converting your existing business to an S corp, consult with a tax professional or CPA to understand the full benefits and ensure compliance with all IRS requirements. Lower audit risk is just one of the many advantages that can help your S corp thrive.