Tax Tip: Audit Risk

March 22, 2008

What are your chances of being audited? The IRS has just released their 2007 data book which provides statistical data on its 2007 fiscal year activities. Overall, audit rates were consistent with what we have seen in recent years with only slight fluctuations. The most audited return continued to be returns claiming the earned income tax credit – accounting for 36.5% of all individual income tax return audits. For entities, S-Corp returns and Partnerships continue to be the least audited with a audit rate of 0.5% and 0.4%, respectively.

The IRS audited approximately 1.4 million individual income tax returns that were filed the prior year. This is a little over 1% of the 134.5 million returns that were filed during that time frame. The bulk of the audits (78%) were correspondence audits in which taxpayers were required to verify of provide evidence of questionable items on their return via mail or other correspondence. Revenue agents, tax compliance officers and tax examiners conducted hands-on audits 22% of the time.

The no-change rate is the number of returns that did not require a change after further clarification. A mere 12% of returns that were examined by revenue agents, tax compliance officers, or tax examiners were cleared with no changes. The rate for correspondence audits was only slightly higher at 16%.

Which returns were selected the most?
503,267 or 36.5% of the audited returns claimed the earned income tax credit

The following are the audit rates for individual returns that included a nonfarm sole proprietor income (“Schedule C”) and that did not claim the earned income tax credit, broken down by total gross receipts:

Under $25,000, 1.3%
From $25,000 to $100,000, 2%
From $100,000 to $200,000, 6.2%
From $200,000 or more, 1.9%.

Returns that included total positive income (TPI) of between $200K and $1 million, the audit rate was 2% for nonbusiness returns and 2.9% for business returns. For returns with TPI of $1 million or more, the audit rate was 9.3%.

The audit rates for Entities is as follows:
Estate/Trust Income Tax Returns, 0.1%
Corporations (C-Corp) with less than $10 million in assets, 0.9%
Corporations (C-Corp) with $10 million or more in assets, 16.8%
S-Corporations, 0.5%
Partnerships, 0.4%
Estate tax returns, 7.7%
Gift tax returns, 0.6%

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