In recently-released data, the IRS divulged the audit statistics for returns the Service audited in fiscal year 2013. It provides information about the number of returns being audited and where the IRS is focusing their enforcement activities.
During fiscal year 2013, the IRS collected almost $2.3 trillion in taxes (net of refunds) and processed more than 240 million returns. More than 118 million individual income tax return filers received tax refunds that totaled $312.8 billion. In fiscal year 2013, the IRS spent an average of 41 cents to collect each $100 of tax revenue.
So what are your chances of being audited? A total of 1,404,931 individual income tax returns were audited, out of a total of 145.8 million individual returns that were filed in the previous year. This is about 0.8% of all individual returns filed, down from the previous year. This downward trend is expected to continue for the foreseeable future because of IRS budget reductions. Only 24.5% of the individual audits were office audits conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 75.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty savvy at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.
What issues are the audits focusing on? Here is a roundup of selected audit rates:
- Earned Income Tax Credit (EITC) – EITC continues to be an area of high taxpayer fraud so it stands to reason these returns were and will be the subject of high audit rates. Of the total number of returns audited, 538,562 (34.6%) were selected on the basis of an earned income tax credit claim.
- Schedule F (Individual Farm Returns) – About 1.3 million individual returns included farm returns. Of this group, only 5,044 (0.4%) were audited.
Individual returns can include additional business related schedules that can increase the odds of an audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EITC returns including these schedules:
- Individual Returns without a Schedule C, E, F, 2106 –0.4%
- Individual Returns with a Schedule E or 2106 – 1.0%
- Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return:
- Under $25,000 – 1.0%
- $25,000 to $100,000 – 2.3%
- $100,000 to $200,000 – 3.0%
- $200,000 or more – 2.7%
The IRS also focuses their audits on higher-income returns, as evidenced by the following statistics based on total positive income (TPI):
- Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5%
- Business returns with a TPI of at least $200,000 and under $1 million – 3.2%
- All returns with a TPI of $1 million or more – 10.8%
For returns other than individual returns, the audit rates by type were:
- Estate and trust income tax returns – 0.1%
- Corporations with less than $10 million of assets – 1.0%
- Corporations with $10 million or more of assets – 15.8%
- S corporations – 0.4%
- Partnerships – 0.4%
- Estate tax returns – 11.6%
- Gift tax returns – 1.1%
In fiscal year 2013, the IRS assessed 29.07 million civil penalties against individual taxpayers, of which 58.3% were for failure to pay and 26.8% were for underpayment of estimated tax. There were also 731,696 assessments for accuracy and negligence penalties.
The IRS received 74,000 offers in compromise in fiscal year 2013 (up from 64,000 in 2012). An offer in compromise is a proposal by a taxpayer to the federal government that would settle a tax liability for payment of less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. In 2013, the IRS accepted 31,000 offers for an acceptance rate of about 42%.
Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to those who understand the audit process and can address potential issues that may arise. So, if you receive an audit notice, the next call you make should be to this office.
If you were unable to file your 2013 individual tax return by April 15th and filed an extension, you should be aware that the extension gave you until October 15th to file your return or face a late filing penalty, which is 4 1/2% of the tax due per month, with a maximum penalty of 22 1/2% of the tax due. There is also a minimum penalty of the lesser of $135 or 100% of the tax due. If you prepaid your 2013 taxes timely through a combination or withholding or estimated taxes and will receive a refund when your return is ultimately filed, there is no penalty for filing late.
You should also be aware that the extension provided you additional time to file your return but not additional time to pay any tax you might owe. Thus, even though the extension avoids the late filing penalty, you are still subject to interest on any unpaid balance through the date of filing. Therefore, you can minimize interest charges by filing as soon as possible.
There are no additional extensions available, so if you owe tax it is important you file by the October 15th due date even if you have to estimate the missing items and file an amended return at a later date.
If you are on extension and have the information needed to complete your return, it is important that you provide that information to this office as soon as possible to avoid being caught up in a last-minute rush. If you are on extension and cannot obtain the information required to complete your return, please call this office as soon as possible to discuss your options.