The IRS has stated that it believes tax return accuracy is at one of the lowest points in history. This indicates that they will be trying any and all means available to tighten compliance with the law in whatever manner they can. The IRS has started aggressively hiring CPAs from public accounting which will lead to more knowledgeable and efficient agents. Their efforts of recruitment are successful because many public accounting professionals no longer want the workload, stress and busy season compression associated with public accounting. This is leaving a void in attracting and retaining public accounting profession talent.
Although many of the audit statistics are flat over the past several years, it is interesting to note the staggering audit rates that exist for businesses with over $10 million in assets. We have many clients with assets that exceed this limit and would suggest that those clients take heed that their chances of being audited are extremely high.
Our firm has found audit rates to be steady or flat over the past several years. Unfortunately, the days of the “kinder and gentler IRS” are gone. We have found the agents very willing to dispute issues and less concerned about upsetting taxpayers. They seem to be less willing to negotiate issues and will spend more time making their arguments.
2006 Data Book (Pub 55B, March 2007); IR 2007-63. The IRS has issued its annual Data Book, which provides statistical data on its fiscal year 2006 (Oct. 1, 2005 through Sept. 30, 2006) activities. The Data Book provides valuable information about how many tax returns the IRS examines (audits) and what categories of returns the IRS is focusing its resources on, as well as data on other enforcement activities like collections.
What are the chances of being examined? A total of 1,283,950 individual income tax returns were audited during fiscal year 2006 out of a total of 132.3 million individual returns that were filed in calendar year 2005. This works out to 0.97 percent of all individual returns that were filed and is more than double the number examined in fiscal year 2000.
Of the total number of returns audited, 517,617 (40.3 percent) were selected on the basis of an earned income tax credit (EITC) claim. Only 23.6 percent of the audits were conducted by revenue agents, tax compliance officers and tax examiners.
DKW Observation: The bulk of the audits (about 76 percent) were correspondence audits.
The no-change rate (returns accepted as filed after examination) was 14 percent for returns examined by revenue agents, tax compliance officers, or tax examiners and 17 percent for compliance centers.
About 584,000 individual returns showed gross receipts from farming (Schedule F). Of this group, only 2,895 (0.50 percent) were audited in 2006.
Examinations of business tax returns grew for the second year in a row, reaching over 52,000 in 2006. To see your chances of being audited this year compared to fiscal year 2004, click here.
Other IRS activity.
Penalties. In fiscal year 2006, the IRS assessed 25.9 million civil penalties against individual taxpayers. Of these, 15.4 million (59.3 percent) were for failure to pay, followed by 6.57 million (25.3 percent) for underpayment of estimated tax. There were 272,321 (1.05 percent) for “accuracy penalties”—assessments of penalties under Code Sec. 6662 for negligence, substantial understatement of income tax, substantial valuation misstatement, substantial overstatement of pension liabilities, and substantial estate or gift tax valuation understatement.
On the corporate side, there were a total of 701,785 penalty assessments, 83.4 percent for either failure to pay or underpayment of estimated tax.
Offers in compromise. In fiscal year 2006, 59,000 offers in compromise were received by IRS and 15,000 (25.4 percent) were accepted. Over recent years, these numbers have been dropping. In 2005, for example, 74,000 offers in compromise were received by IRS and 19,000 (25.6 percent) were accepted.
Criminal cases. The IRS initiated 3,907 criminal investigations in fiscal year 2006. There were 2,720 referrals for prosecution and 2,019 convictions. Of those sentenced, 81.7 percent were incarcerated. By way of comparison, in fiscal year 2005, the IRS initiated 4,269 criminal investigations, and there were 2,859 referrals for prosecution and 2,151 convictions. Of those sentenced, 83 percent were incarcerated.
Information returns. The IRS received a total of 1.561 billion information returns in fiscal year 2006, including Forms 1098 (mortgage interest, student loan interest and tuition), 1099 (interest, dividends, etc.), W-2 (wages), W-2G (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 3.6 percent were submitted on paper. Most of the information returns were filed electronically or on magnetic tape.
The IRS also notes that during fiscal year 2006, it collected more than $2.2 trillion in taxes and processed over 228 million returns. Over 80 million returns, including 54.3 percent of individual tax returns, were filed electronically in 2006. Over 108 million individual income tax return filers received tax refunds totaling $243 billion. In fiscal year 2006, the IRS spent an average of 42 cents to collect each $100 of tax revenue.
Thanks to David Wiggins, my tax partner, for contributing the information from the IRS Data Book. For some of you, this information may help you sleep better at night knowing your odds for audit are relatively low, if however, you are in the $10 million asset bracket be prepared because your odds are much higher.
Vol 4, Issue 5