We are often asked “what are my chances of being audited”? This is obviously a hard question to answer, but the IRS publishes an annual “data book” which gives us great insight into where they are focusing their attention.
According to the 2012 Data Book (based on 2011 tax filings) of the 143,399,737 individual tax returns filed in calendar year 2011, 1,481,966 were audited. This works out to roughly 1.0%, down slightly from 1.1% the previous year. Of the total number of individual income tax returns audited in FY 2012, 487,408 (32.9%) were for returns with an earned income tax credit (EITC) claim, up from 483,574 (30.9%) of all audited returns for FY 2011.
Only 24.3% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s slightly down than the 25% figure for the previous year. The 75.7% balance of the audits were correspondence audits, slightly up from 75% for the previous year. This is definetely the direction of the IRS, so we expect this number to grow in the years ahead.
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, 3.6% of returns were audited in FY 2012, down from 4.3% in FY 2011
- For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.4% of returns were audited in FY 2012, a decrease from 3.8% in FY 2011
- Of the returns showing farm (Schedule F) income, 0.5% were audited in FY 2012 versus 0.6% in FY 2011
- For returns showing total positive income of $200,000 to $1 million, 2.8% of returns not showing business activity were audited, and 3.7% of returns showing business activity were audited. The audit rates for such returns were 3.2% and 3.6%, respectively, for the previous year
- For FY 2012, the audit rate for returns with total positive income of $1 million or more was 12.1%, slightly down from the 12.5% rate for FY 2011.
Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 0.85% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for FY 2011), and 1.96% for those with $200,000 to $500,000 of AGI (down from 2.66% for FY 2011). Exam coverage increased to 8.9% for those with at least $1 million but less than $5 million of AGI (down from 11.8% for FY 2011). 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 1120-S, 1.5%, same as the year before.
- For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.7%; $1–$5 million, 2.1%; and $5–10 million, 2.6%. For FY 2011, the percentages were, respectively, 1.6%, 1.9%; and 2.6%.
- For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.8%, up slightly from 17.6% for FY 2011. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 10.5% for those with total assets of $10–$50 million (down from 13.4% for FY 2011); 22.7% for those with $250–$500 million (up from 17.4% for FY 2011); 45.4% for those with $5–20 billion (down from 50.5% for FY 2011), and 93% for those with $20 billion or more (down from 95.6% for FY 2011).
- For partnership and S corporation returns, the audit rate was 0.5%, as compared to 0.4% for the year before.
IRS’s activity on other fronts. Here’s a roundup of some of the other valuable information carried in the new IRS Data Book.
Number of returns filed. The number of partnership returns filed (Form 1065) increased by 1.5%, and the number of S corporation returns (Form 1120-S) grew by .8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.2%.
The number of individual income tax returns (e.g., Forms 1040, 1040-A, 1040-EZ) increased by 1.8%, reflecting the second consecutive increase (likely due to improvement in economic activity) after the 2% drop exhibited in FY 2010 and the 6.7% drop shown in FY 2009.
The number of estate tax returns filed in FY 2012 increased by 145.5%, following last year’s 62.1% plunge (which was attributable to the temporary repeal of the tax for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010).
Math errors on individual returns. IRS sent out roughly 2.7 million math error notices relating to the 2011 return.
Of the total math error notices, 23.9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 15.3% related to exemption number/amount, 13.4% related to the EITC, 10.6% related to the standard/itemized deduction(s), 5.3% related to the child tax credit, and 5.2% related to the first-time homebuyer credit.
Penalties. In FY 2012, IRS assessed 28.5 million civil penalties against individual taxpayers, slightly down from 28.75 million assessed in the previous year. Of the FY 2012 assessments, the “top three” penalties in percentage terms were 60.2% for failure to pay, 24.8% for underpayment of estimated tax, and 11.5% for delinquency. On the business side, there were a total of 995,533 civil penalty assessments (down from 1,080,027 for the year before), and the “top three” penalties in percentage terms were 51.4% for delinquency, 25.8% for failure to pay, and 20% for estimated tax.
In FY 2012, 64,000 offers-in-compromise were received by IRS (versus 59,000 for FY 2011), and 24,000 were accepted (up from 20,000 for the year before). Thus, the acceptance rate rose to 37.5% in FY 2012 from 33.9% in FY 2011.
IRS initiated 5,125 criminal investigations in FY 2012. There were 3,701 referrals for prosecution and 2,634 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2011, IRS initiated 4,720 criminal investigations, there were 3,410 referrals for prosecution, and there were 2,350 convictions. Of those sentenced, 81.7% were incarcerated.