Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.
This is probably one of the most frequently asked questions. The IRS has just come out with new data for a ten-year period. In the tables below we've reproduced data for the most recent three years for selected categories. Following the table is a brief analysis of the raw data. Keep in mind that these are just broad numbers. Your chances of getting audited depends on many factors. Have only wage, interest, and capital gain income and take the standard deduction? Your chances are probably much less than indicated. Take a large charitable contribution deduction, have a Schedule C, or rental property, and your chances are likely to be higher. The same is true for business returns.
Individual Returns
Total Individual ReturnsBusiness ReturnsFY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Field Examinations 344,152 291,643 267,076 - 8.4 Correspondence Audits 1,060,779 950,836 961,041 1.1 Total Exams 1,404,931 1,242,479 1,228,117 - 1.1 Total Returns 145,819,388 145,236,429 146,861,217 1.1 Percent Audited 0.96% 0.86% 0.84%Income Under $200,000FY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Field Examinations 270,636 234,758 214,678 - 8.6 Correspondence Audits 932,336 848,451 851,256 0.3 Total Exams 1,232,972 1,083,209 1,065,939 - 1.6 Total Returns 140,537,584 139,369,439 140,642,631 0.9 Percent Audited 0.88% 0.78% 0.76%Income $200,000 and HigherFY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Field Examinations 73,516 56,885 52,398 - 7.8 Correspondence Audits 98,443 102,385 109,786 7.2 Total Exams 171,959 159,270 162,184 1.8 Total Returns 5,281,804 5,866,000 6,218,586 6.0 Percent Audited 3.26% 2.71% 2.61%Income $1,000,000 and HigherFY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Field Examinations 19,167 15,029 13,781 - 8.3 Correspondence Audits 20,254 19,322 25,972 34.4 Total Exams 39,421 34,361 39,753 15.7 Total Returns 291,831 458,337 416,178 - 9.2 Percent Audited 10.85% 7.50% 9.55%
Small Corporation Returns (Assets Under $10 Million)CollectionFY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Returns Examined 17,604 17,257 16,460 - 4.6 Returns Filed in Prior CY 1,849,758 1,812,140 1,797,360 - 0.8 Percent Audited 0.95% 0.95% 0.92%Large Corporation Returns (Assets $10 Million and Higher)
FY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Returns Examined 9,876 7,858 7,410 - 5.7 Returns Filed in Prior CY 62,347 64,261 66,484 3.5 Percent Audited 15.84% 12.23% 11.15%Sub S Returns
FY 2013 FY 2012 FY 2015 % chg. 2014 to 2015 Returns Examined 18,670 16,317 18,595 14.0 Returns Filed in Prior CY 4,476,307 4,518,765 4,605,766 1.9 Percent Audited 0.42% 0.36% 0.40%Partnership Returns
FY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Returns Examined 14,870 15,779 19,212 27.8 Returns Filed in Prior CY 3,550,071 3,649,385 3,766,567 3.2 Percent Audited 0.42% 0.43% 0.51%Exempt Organization ReturnsFY 2013 FY 2014 FY 2015 % chg. 2014 to 2015 Returns Examined 10,575 9,084 6,392 - 29.6 Returns Filed in Prior CY 771,675 765,395 787,339 2.6 Percent Audited 1.37% 1.06% 0.81%
Enforcement Actions
FY 2013 FY 2014 FY 2015 % chg. 2014 to 2015
Levies 1,855,095 1,995,987 1,464,026 - 26.7
Returns Filed in Prior CY 602,005 535,580 515,247 - 9.4
Seizures 547 432 426 - 1.3
Comments and AnalysisFrom 2013 to 2015 the number and percentage of returns audited has decreased, pretty much across the board. But looking deeper, audits declined from 2013 to 2014 and went up slightly in 2015. For individuals with income of less than $1 million, the percent audited decreased from 2014 to 2015, mostly at the lower end. Individuals with income of $1 million or more saw an increase from 2014 to 2015, but still below the percentage in 2013. If your income is less than $200,000, your audit chances are 3/4 of 1 percent; $200,000 to $1 million your chances go up to 2.6 percent; over $1 million they're almost 10%. In general, field audits (which involve a visit from an agent) are down, correspondence audits are where the increase occurred.
The total number of partnership and S corporation audits increased substantially on a percentage basis (although the total number is relatively low). The percentage audited increased slightly from 2014 to 2015, but your chances of getting audited is still about 1/2 of 1 percent.
But keep in mind that your chances of getting audited could be significantly higher--or lower. Madison Partners is a two-man partnership generating about $375,000 per year in revenue. Chatham LLC is a construction company with 50 employees and $7 million in revenue with $1 million in assets. Other things being equal, Chatham's chances of an audit are much higher. Same for individuals. Fred and Sue had income of only $126,000, but they have rental losses, and took property contributions to charity of $12,000. Mike and Jennifer work on Wall Street and have a combined W-2s of $1.2 million. But they rent an apartment, have no kids, and no outside investments. Fred and Sue's audit chances are probably higher than Mike and Jennifer. While the numbers are interesting and give an idea of your overall chances of getting audited in a particular category, the IRS is more likely to pick your return because of a particular triggering item. That could be charitable contributions materially in excess of the average for returns at your income level or claiming a substantial deduction for property contributions. Property contributions beyond a certain amount require an appraisal which are frequently challenged by the IRS. Checking the box for real estate professional and fully deducting rental losses is almost sure to generate an inquiry. There are a host of others.
Keep in mind the IRS is also auditing "smarter". They're focusing on issues more likely to produce results for the government. States too are getting smarter and using computers to analyze data. You could escape an IRS audit only to be trapped by your home state or a state in which you do business.
Of course, none of the numbers above matter if your return is picked. Playing the audit lottery has become more dangerous. If the IRS can assess the accuracy-related penalty, it generally will. That could 20% to your tax assessment. Interest will increase the total and, while relatively low, it can add up quickly.
Best advice? Listen to your tax professional.
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 03/15/16