IRS Audit Rates Rise But Are Still Relatively Low.
IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. The data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010.
Audit Rates.
Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. Of the total number of individual income tax returns audited in FY 2011, 483,574 (30.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 473,999 (30%) of all audited returns for FY 2010. This means that a large portion of audits are focused on low income taxpayers.
Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That's higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.
Following are selected audit rates for individuals not claiming the EITC:
- For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
- For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%. The rate for FY 2010 was 8.4%.
Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Audit rates also 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 1120S, 1.5%, versus 1.4% for the year before.
- For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1-$5 million, 1.9%; and $5-10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
- For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.6%, up from 16.6% for FY 2010. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.3% for those with total assets of $10-$50 million (slight decrease from 13.4% for FY 2010); 17.4% for those with $250-$500 million (versus 16.1% for FY 2010); 50.5% for those with $5-20 billion (up from 45.3% for FY 2010), and 95.6% for those with $20 billion or more (down from 98% for FY 2010).
- For partnership and S corporation returns, the audit rate was .4%, the same as for the year before. Most closely held businesses are in this category. It's an amazingly low audit rate.
Returns.
The number of partnership returns filed (Form 1065) increased by 1.9%, and the number of S corporation returns (Form 1120S) grew by .8%. The number of C or other corporation returns dropped by 1.8%.
The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.7%, a turnaround, due no doubt to improvement in economic activity, from 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 2011 plunged by 62.1%, reflecting recent tax law changes. (The estate tax was temporarily repealed for deaths in calendar year 2010).
Penalties.
In FY 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the FY 2011 assessments, the "top three" penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the "top three" penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.
Criminal Enforcement.
IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.
