IRS turns up the audit heat again

Every year, the IRS provides valuable tax return information in its "Data Book." (IRS Publication 55B) This year is no exception. The IRS recently released the data for its 2010 fiscal year spanning Oct. 1, 2009, through Sept. 30, 2010. (IRS Internal News Release 2011-27)

Alert: Tax audits of individual taxpayers overall went up. Other significant changes were revealed for taxpayers with total positive income (TPI) between $200,000 and $1 million, businesses with gross receipts of $25,000 and higher and individuals claiming the earned income credit (EIC). Here's the lowdown:

Audit rates for small corporations
 
Corporate sizeFiscal year 2009Fiscal year 2010
 
Assets of $250,000 to $1 million1.3%1.4%
Assets of $1 million to $5 million1.8%1.7%
Assets of $5 million to $10 million2.7%3.0%
Assets of $10 million or more14.5%14.5%
  • Individuals: Of the 142,823,105 total individual income tax returns filed, 1,581,394 were audited. This works out to approximately 1.10%. The rate for the previous year was 1.00%. Of the total number of individual income tax returns audited in 2010, 473,999 (30%) were for returns with an EIC claim (down from 35.64% of all audited returns for 2009). Only 21.7% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners (down from 22.8%). The bulk of the audits (about 78.3%) were correspondence audits (up from 77.1%).
  • High-income taxpayers: For returns showing TPI of $200,000 to $1 million, 2.5% of returns not showing business activity were audited (up from 2.3%), while 2.9% of returns showing business activity were audited (down from 3.1%). For returns with TPI of $1 million or more, 8.4%, were audited--2% higher than the 6.4% audit rate for 2009.
  • Businesses: For business returns (other than farm returns) showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited in 2010 (up from 4.2%). For business returns (other than farm returns) showing total gross receipts of $200,000 or more, 3.3% of returns were audited in 2010 (up from 3.2% in 2009).

The audit rates for all corporate returns, other than S corporations, were 1.4% (up from 1.3%). Audit rates for C corporations varied by size and rose for corporations with assets of $5 million or more (see box). For partnership and S corp returns, the audit rate was 0.4%, the same as the prior year.

  • Math errors: Of the roughly 10.5 million math error notices the IRS issued for individual 2009 returns, 60.8% were attributable to the Making Work Pay Credit (MWPC). Of the total math error notices, 9% were for errors in calculating other taxes--including errors relating to self-employment tax, alternative minimum tax and household employment tax--while 4.9% were related to exemptions, 4.4% to the EIC, 4.1% to the standard/ itemized deduction and 1.3% to the first-time homebuyer credit.
  • Penalties: In 2009, the IRS assessed 27.1 million civil penalties against individual taxpayers (up from 26.4 million civil penalties assessed in the previous year. Of the 2010 penalties, 57.3% were assessed for failure to pay, 27.3% for underpayment of estimated tax and 13% for delinquency. For business taxpayers, a total of 1,145,931 civil penalty assessments were made (up from 970,098). Of those, 42.1% were assessments for failure to pay or underpayment of estimated tax.
  • Offers-in-compromise: In 2010, 57,000 offers-in-compromise were received by the IRS (up from 52,000). Of those, 14,000 were accepted (up from 11,000).
  • Criminal cases: The IRS launched 4,706 criminal investigations in 2010. There were 3,034 referrals for prosecution and 2,184 convictions. Of those sentenced, 81.5% were incarcerated (including imprisonment, home confinement, electronic monitoring or a combination). To compare, in 2009 the IRS initiated 4,121 criminal investigations with 2,570 referrals for prosecution. Of those sentenced, 81.2% were incarcerated.

Reprinted with permission from The Tax Strategist, May 2011. For continuing advice on this and numerous other tax strategies, go to www.TaxStrategist.net. Receive 2 FREE Bonus reports and a 40% discount on The Tax Strategist when you use Promo Code WN0013.

 

You may like these other stories...

Truckers and other owners of heavy highway vehicles take note: Your next federal highway use tax return is due on September 2.The September 2 due date, which was pushed back two days because the normal August 31 deadline...
The head of the IRS has a message for taxpayers and tax preparers who have endured long wait times while on the phone with the tax agency: Call your member of Congress.During his keynote speech at the 69th Annual Meeting of...
Regulators struggle with conflicts in credit ratings and auditsThe Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act in 2002, released its third annual report on audits of...

Already a member? log in here.

Upcoming CPE Webinars

Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.