What are your chances for being audited?

IRS has issued its annual data book, Publication 55B (Rev. 3-2010). The data book provides valuable information about how many tax returns IRS audits, the categories of returns on which the IRS is focusing and data on enforcement activities and collections.

 

If you are a middle to upper middle class individual, you have about a 2.3% chance of being audited, which is down .3% from last year. If you are small corporation, your chances of being audited are 2.7% or lower. Larger corporations experienced an audit rate of approximately 14.5%. For S corporation and partnerships, the audit rate was .4%, the same as the previous year. 100% of corporations with total assets of $20 billion or more are audited.

 

138,949,670 total individual income tax returns with a filing requirement (excluding returns filed only to receive an economic stimulus payment) of which 1,425,888 were audited. This means that approximately 1% of individual returns are audited, which is the same percentage as for the previous year. Of the total number of individual income tax returns audited in FY 2009, 35.64% (508,180) were for returns with an earned income tax credit (EITC) claim; this is approximately the same as for FY 2008.

 

Only 22.8% of the individual audits were conducted by revenue agents, tax compliance officers, and tax examiners; 77.1% of audits were correspondence audits. These percentages are comparable to those for FY 2008.

 

Examination coverage increases for higher income earners, but coverage was less than it was for the prior year. For example, the percentage was .67% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from .98% for FY 2008), 1.86% for those with $200,000 to $500,000 of AGI (down slightly from 1.92% for FY 2008), and 5.35% for those with $1 to $2 million of AGI (down from 6.47% for FY 2008).

 

In the case of individual income tax returns that also include business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.2% of returns were audited in FY 2009, versus 3.8% in FY 2008. On the other hand, individual income tax returns that also include business returns other than farm returns showing total gross receipts of $200,000 or more, only 3.2% of returns were audited in FY 2009, versus 3.1% in FY 2008.

 

Farm returns are not widely audited as the data shows that .3% were audited in FY 2009 versus .6% in FY 2008.

 

For returns showing total positive income of $200,000 to $1 million, 2.3% of returns not showing business activity were audited, and 3.1% of returns showing business activity were audited; for FY 2008, these percentages were 2.6% and 2.8% respectively.

 

For FY 2009, the audit rate for returns with total positive income of $1 million or more was 6.4%, versus 5.6% in FY 2008.

 

 

2,245,168 regular C corporation returns (i.e., Form 1120), 3,348,845 partnership returns (i.e., Form 1065) and 4,390,857 S corporation return (i.e., Form 1120S) were filed.

 

For all corporate returns other than Form 1120S, the overall percentage of returns audits was 1.3%, which is the same as for the year before.

 

The audit rates for small corporations with total assets of:

For large corporations, those with total assets of $10 million or more, the overall audit rate was 14.5%, down from 15.3% for FY 2008. The audit rate for large corporations increased with the size of the entity. For example, the audit rates were 10.1% for those with total assets of $10–$50 million (versus 11.7% for FY 2008); 15.8% for those with $250–$500 million (versus 14.2% for FY 2008); 48.7% for those with $5–20 billion (versus 64.2% for FY 2008), and for both fiscal years, 100% for those with $20 billion or more. Surprisingly, the FY audit rate for 2009 (or for FY 2008) may exceed 100% of the returns filed in calendar year 2008 (or calendar year 2007), since examinations may be conducted on returns filed in prior calendar years.

 

For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.

 

 

The number of business returns filed in FY 2009 versus those filed in FY 2008 illustrates the growing popularity of passthroughs. The number of partnership returns filed (Form 1065) grew by 7.8% and the number of S corporation returns (Form 1120S) grew by 1.3%. By contrast, the number of C or other corporation (e.g., for REMICs, REITs, RICs, etc.) returns dropped by 2.4%.

 

 

The number of individual income tax returns filed in FY 2009 versus FY 2008 fell 6.7%, from 153,308,000 to 142,983,000. Presumably this is the result of the general contraction of economic activity and growth in the ranks of the unemployed

 

 

In FY 2009 IRS assessed 26.387 million civil penalties against individual taxpayers, down from 30.223 million civil penalties assessed in the previous year. Of the FY 2009 assessments, the “top three” penalties in percentage terms were 54.71% for failure to pay, 28.67% for underpayment of estimated tax, and 14.42% for delinquency. On the business side, there were a total of 970,098 civil penalty assessments, and 55.8% of these assessments was for either failure to pay or underpayment of estimated tax. (The data was organized differently for FY 2008 so comparisons can't be made to the previous year.)

 

 

Anyone who watches cable television has seen advertisements for lawyers and organizations who promise to cut your past due tax bills by getting the IRS to accept significantly less than what you owe. The statistic shows that your chances of obtaining a favorable offer in compromise with the IRS are slightly more than 25%. In FY 2009 52,000 offers in compromise were received by IRS, and 11,000 (26%) were accepted. These figures reversed declines in the two preceding years.

 

 

The IRS initiated 4,121 criminal investigations in FY 2009. There were 2,570 referrals for prosecution and 2,105 convictions. Of those sentenced, 81.2% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). In FY 2008, IRS initiated 3,749 criminal investigations; there were 2,785 referrals for prosecution. Of those sentenced, 80.9% were incarcerated.