Wonder What Your Odds of Being Audited Are?

In recently-released data, the IRS released the audit statistics for return audit for the IRS fiscal year 2007. It provides information about how many returns are being audited and where the IRS is focusing their enforcement activities.

During fiscal year 2007, the IRS collected almost $2.4 trillion in taxes (net of refunds) and processed more than 235 million returns. More than 114 million individual income tax return filers received tax refunds that totaled $248.6 billion. In fiscal year 2007, IRS spent an average of 40 cents to collect each $100 of tax revenue, which was the lowest in seven years and down from 42 cents per $100 in fiscal year 2006.

So what are your chances of being audited? A total of 1,384,563 individual income tax returns were audited out of a total of 134.5 million individual returns that were filed in the previous year. This is about 1.0% of all individual returns filed, up slightly from the previous year. Only 22.49% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty good at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.

What issues are the audits focusing on? Here is a roundup of selected audit rates:

o Earned Income Credit (EIC) - Of the total number of returns audited, 503,267 (36.5%) were selected on the basis of an earned income tax credit (EITC) claim.

o Schedule F (Individual Farm Returns) - About 1.5 million individual returns included farm returns. Of this group, only 5,705 (0.4%) were audited.

Individual returns can include additional business related schedules that can increase the odds of audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EIC returns including these schedules:

o Individual Returns without a Schedule C, E, F, 2106 – 4%
o Individual Returns with a Schedule E or 2106 – 1.2%
o Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return.

- Under $25,000 – 1.3%
- $25,000 to $100,000 – 2%
- $100,000 to $200,000 – 6.2%
- $200,000 or more – 1,9%

The IRS also focuses their audit levels on higher-income returns as evidenced by the following statistics based on total positive income (TPI):

o Non-business Returns with a TPI of at least $200,000 and under $1 million – 2%
o Business returns with a TPI of at least $200,000 and under $1 million – 2.9%
o All returns with TPI of $1 million or more – 9.3%

For returns other than individual returns, the audit rates by type were:

o Estate and trust income tax returns - 0.1%
o Corporations with less than $10 million of assets - 0.9%
o Corporations with $10 million or more of assets - 16.8%
o S corporations - 0.5%
o Partnerships - 0.4%
o Estate tax returns - 7.7%
o Gift tax returns - 0.6%

In fiscal year 2007, IRS assessed 27.3 million civil penalties against individual taxpayers of which 55% were for failure to pay and 28.2% for underpayment of estimated tax. There were also 327,822 assessments for accuracy and negligence penalties.

The IRS is also becoming less likely to settle tax disputes with taxpayers who, for hardship reasons, offer to pay less than the amount due in order to settle up with the IRS. In 2007, 46,000 offers in compromise were received by IRS, and only 12,000 (26%) were accepted.

On the corporation side, there were a total of 762,718 civil penalty assessments (up from 701,785 for FY 2006), 82.9% for either failure to pay or underpayment of estimated tax.

Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to those of us who understand the audit process and can address potential issues that arise. So, if you receive an audit notice, the next call you make should be to this office.

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