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Higher Income Means Higher Chance of Audit
Higher Income Means Higher Chance of Audit
The just-released 2011 IRS Data Book provides statistical information on IRS examinations, collections, and other activities for the most recent fiscal year that ended in 2011. A comparative analysis of the 2011 Data Book with 2010 Data Book statistics shows, among other things, a notable increase in the odds of being audited within several higher-income categories.
CCH Take Away: "While the IRS Data Book remains a useful reference, it may be noteworthy for what it doesn't contain," Susan Long, professor, Syracuse University and co-director, Transactional Records Access Clearinghouse (TRAC) told CCH. "For example, little heralded is the dramatic shift in what a ‘tax audit’ actually means. An illustration — during FY 2011 the average amount of time spent by an IRS agent auditing a corporate return is now down to less than half what it was in 2004."
Individual taxpayers collectively were audited at a 1.1 percent rate over the FY 2011 period, based on 1.5 million audited returns out of the 140.83 million returns that were filed. While this rate is about the same as in FY 2010, variations occurred within the income ranges. An uptick was particularly noticeable in the upper brackets (see statistics, below).
Comment: The IRS Data Book does not show what deductions or credits are more likely to attract an audit, with the exception of two instances: individuals filing business returns Schedules C, E, F, or Form 2106 and individuals claiming the earned income credit (EIC). Business returns, as discussed below, can more than quadruple the odds of an audit. On the other hand, audits of the EIC for lower income individuals accounted for 30 percent of all audits, the IRS reported.
Both correspondence and field audits were counted in the statistics. Correspondence audits accounted for 75 percent of all audits for FY 2011 (down from 77.1 percent in FY 2010), while audits conducted face to face by revenue agents were only 25 percent of the total, albeit representing an increase from the 21.7 percent level in FY 2010. Nevertheless, business returns and higher-income individuals are more likely to experience an audit by a revenue agent.
Examination coverage: individuals
The following audit statistics, taken from the FY 2011 Data Book (and contrasted with FY 2010 Data Book statistics) show an increase in the audit rate, especially in proportion to adjusted gross income (AGI) level:
- No AGI: 3.42 percent (3.19 percent in 2010)
- Under $25,000: 1.22 percent (1.18 percent in 2010)
- $25,000 – $50,000: 0.73 percent (0.73 percent in 2010)
- $50,000 – $75,000: 0.83 percent (0.78 percent in 2010)
- $75,000 – $100,000: 0.82 percent (0.64 percent in 2010)
- $100,000 – $200,000: 1.00 percent (0.71 percent in 2010)
- $200,000 – $500,000: 2.66 percent (1.92 percent in 2010)
- $500,000 – $1 million: 5.38 percent (3.37 percent in 2010)
- $1 million – $5 million: 11.80 percent (6.67 percent in 2010)
- $5 million – $10 million: 20.75 percent (11.55 percent in 2010)
- $10 million and over: 29.93 percent (18.38 percent in 2010)
Examination coverage: business returns
For individual income tax returns that include business income (other than farm returns), the 2011 audit rate statistics based upon business income (total gross receipts) reveals the IRS’s recognition that audits of small business returns yield proportionately higher deficiency amounts:
- Gross receipts under $25,000: 1.3 percent (1.2 percent in 2010)
- Gross receipts $25,000 – $100,000: 2.9 percent (2.5 percent in 2010)
- Gross receipts $100,000 – $200,000: 4.3 percent (4.7 percent in 2010)
- Gross receipts over $200,000: 3.8 percent (3.3 percent in 2010)
The difference in audit rates between returns with and without business income, as measured by total positive income of at least $200,000 and under $1 million, provide further evidence of the IRS’ tendency toward auditing business returns: 3.6 percent for returns with business income versus 3.2 percent without in FY 2011 (2.9 percent versus 2.5 percent in FY 2010).
The audit rates for corporations are consistent with the deficiency experience that the IRS has had examining corporations of varying sizes. Some selected audit rates include:
- For small corporations showing total assets of $250,000 to $1 million, the audit rate for FY 2011 was 1.6 percent (1.4 percent in 2010); $1 million to $5 million, the rate was 1.9 percent (1.7 percent in 2010); and for $5 million to $10 million, the rate was 2.6 percent (3 percent in 2010).
- For larger corporations showing total assets of $10 million to $50 million, the audit rate was 13.3 percent (13.4 percent in 2010) in contrast to those at the top end with total assets from $5 billion to $20 billion at 50.5 percent (45.3 percent in 2010).
- For S corporations and partnerships, the overall audit rate was 0.4 percent (same as in 2010), in contrast to an overall 1.5 percent rate for corporations (1.4 percent in 2010).
Comment: IRS Commissioner Shulman, in his preface to the 2011 Data Book, also touted the “major strides [taken] in breaking through the walls of international bank secrecy.” He reported that the 2009 and 2011 voluntary disclosure programs yielded $4.4 billion from 34,000 voluntary disclosures.
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