Tax Law and Business Organization Strategy

What are your chances for being audited?

The IRS has issued its annual data book, which provides statistical data on its 2008 fiscal year. The data book provides valuable information about how many tax returns IRS examines, and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections. A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).

Of the total number of returns audited, 503,755 (36.2%) were selected on the basis of an earned income tax credit (EITC) claim (down slightly from the 36.5% rate for FY 2007).

Only 22.3% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners. Most of the audits (about 77.7%) were correspondence audits. These percentages are about the same as they were in FY 2007.

About 1.36 million individual returns were farm returns that showed gross receipts from farming (Schedule F). Of this group, only 7,542 (0.5%) were audited in 2008.

The no-change rate (returns accepted as filed after examination) was 11% for individual returns examined by revenue agents, tax compliance officers, or tax examiners, and 15% for correspondence exams.

Here's a roundup of selected audit rates from IRS' latest databook.

  • Following are the audit rates for individual nonbusiness returns that didn't claim the earned income tax credit:
    • For “selected nonbusiness returns” (includes returns without a Schedule C (nonfarm sole proprietorship), Schedule E (supplemental income and loss), Schedule F (profit or loss from farming), or Form 2106 (employee business expenses), 0.4% (same as for FY 2007).
    • For returns with Schedule E or Form 2106 (excludes returns with a Schedule C, nonfarm sole proprietorship, or Schedule F, profit or loss from farming), 1.3% (up from 1.2% for FY 2007).
    • For nonfarm business returns by size of total gross receipts: under $25,000, 1.2% (down from 1.3% for FY 2007); $25,000 under $100,000, 1.9% (down from 2% for FY 2007); $100,000 under $200,000, 3.8% (down from 6.2% for FY 2007); and $200,000 or more, 0.6% (down from 1.9% for FY 2007).
    • For returns with total positive income (TPI) of at least $200,000 and under $1 million, the audit rate was 2.6% for nonbusiness returns (down from 2% for FY 2007) and 2.8% for business returns (down from 2.9% for FY 2007). For returns with TPI of $1 million or more, the audit rate was 5.6% (down from 9.3%).
  • The audit rates for entities were as follows:
    • Fiduciary (estate and trust income tax returns), 0.1% (the same as for FY 2007);
    • Corporations with less than $10 million of assets, 1.0% (up from 0.9% for FY 2007);
    • Corporations with $10 million or more of assets, 15.3% (down from 16.8% for FY 2007);
    • S corporations, 0.4% (down from 0.5% for FY 2007);
    • Partnerships, 0.4% (same as FY 2007);
  • Estate tax returns, 8.1% (up from 7.7% for FY 2007); and
  • Gift tax returns, 0.4% (down from 0.6% for FY 2007).
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