- Business Owners face a 4.5% chance of audit
- More audits are detailed audits with Revenue Agents rather than correspondence Audits
- Almost 1/3 of Individual Returns Audited were for the Earned Income Tax Credit
IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010.
What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. Of the total number of individual income tax returns audited in FY 2011, 483,574 (30.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 473,999 (30%) of all audited returns for FY 2010.
Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.
Following are selected audit rates for individuals not claiming the EITC:
- For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in FY 2011, down from 4.7% in FY 2010.
- For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in FY 2011, an increase from 3.3% in FY 2010.
- Of the returns showing farm (Schedule F) income, .6% were audited in FY 2011 versus .4% in FY 2010.
- For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
- For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for FY 2010.
Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.
Select audit rates for business returns were as follows:
- For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
- For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
- For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.6%, up from 16.6% for FY 2010. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.3% for those with total assets of $10–$50 million (slight decrease from 13.4% for FY 2010); 17.4% for those with $250–$500 million (versus 16.1% for FY 2010); 50.5% for those with $5–20 billion (up from 45.3% for FY 2010), and 95.6% for those with $20 billion or more (down from 98% for FY 2010).
- For partnership and S corporation returns, the audit rate was .4%, the same as for the year before. Note: The IRS will audit a Partnership or S corporation directly, or if one of the partners/shareholders are audited for the income. This means those tax advisers claiming S corporations are audited less than LLC are simply wrong when looking at the entire picture.
Thanks to RIA for reporting the IRS information.