Tax season is gearing up, an annual source of tension for many Americans. The Internal Revenue Service (“IRS”) looms in the background, with a mission to “Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all”. Yet the benevolent vibe of the message is inconsistent with how most see the IRS. The fear of an IRS audit is a significant factor in motivating taxpayers to pay their taxes on time and accurately.
Yet only a relative few will actually experience an IRS audit. The IRS accepts most Federal tax returns exactly as they are filed. And many of the IRS enforcement activities are not the involved field audit one likely envisions, but merely a mailed notice of a change in the taxes owed (otherwise known as a correspondence audit) that may be a fairly minor amount or even result in a refund.
The IRS publishes an annual data book that reports on such items, with the most recent representing 2013 activity related to 2012 returns. The examination rates on certain types of entities can be summarized as follows:
|Return Type||Number Filed||Number Examined||Percentage Coverage||Correspondence Audit||Field Audit|
|S Corp (nontaxable)||4,476,000||19,000||.4%||1,000||17,000|
Notably, the IRS tends to perform more field audits with corporations and partnerships, but relies more heavily on correspondence audits for individuals and estates/trusts. Once the IRS selects a return for audit, most audits find that more tax is owed:
|Return Type||% with Change Required||Total Additional Tax||Avg. Add’l Tax Per Return||% with Change Required||Total Additional Tax||Avg. Add’l Tax Per Return|
|Individual||88%||$8.46 billion||$7,971||91%||$5.59 billion||$16,255|
|Estate/Trust||46%||$.01 billion||$23,997||89%||$0.13 billion||$639,965|
|Taxable Corp||70%||$.05 billion||$4,645||73%||$16.64 billion||$180,629|
|S Corp (nontaxable)||50%||N/A||N/A||69%||N/A||N/A|
Generally individual taxpayers with higher adjusted gross income (“AGI”) are more likely to be selected for an audit:
|AGI on Return||% of Total Filed||Examination Rate|
|$1 to $25K||39.91%||1.00%|
|$25K to $50K||23.55%||.62%|
|$50K to $75K||13.02%||.60%|
|$75 to $100K||8.12%||.58%|
|$100K to $200K||10.09%||.77%|
|$200K to $500K||2.60%||2.06%|
|$500K to $1 million||.41%||3.79%|
|$10 million plus||.01%||24.16%|
A related article also describes how to avoid common red flags that can get your return selected by the IRS for audit..