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Beware: IRS audit rates up across the board

by on
in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has released the new “Data Book” (IRS Publication 55B) for its 2010 fiscal year spanning Oct. 1, 2009, through Sept. 30, 2010. (IRS Internal News Release 2011-27)

Alert: Tax audits of individual taxpayers went up, especially for high-income folks. Other changes were revealed for taxpayers with total positive income (TPI) between $200,000 and $1 million, businesses with gross receipts of $25,000 and higher, and individuals claiming the earned income credit (EIC). Here’s the lowdown.

Individuals

Of the 142,823,105 total individual income tax returns filed, 1,581,394 were audited. This works out to approximately 1.10% or 0.10% higher than the 1.00% rate for the previous year. Of the total number of individual income tax returns audited in 2010, 473,999 (30%) were for returns with an EIC claim (down from 35.64% of all audited returns for 2009).

Only 21.7% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners (down from 22.8%). The bulk of the audits (about 78.3%) were correspondence audits (up from 77.1%).

High-income taxpayers

For returns showing TPI of $200,000 to $1 million, 2.5% of returns not showing business activity were audited (up from 2.3%), while 2.9% of returns showing business activity were audited (down from 3.1%). For returns with TPI of $1 million or more, 8.4%, were audited—a full 2% higher than the 6.4% audit rate for 2009.

Businesses

For business returns (other than farm returns) showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited in 2010 (up from 4.2%).  For business returns (other than farm returns) showing total gross receipts of $200,000 or more, 3.3% of returns were audited in 2010 (up from 3.2% in 2009).

The audit rates for all corporate returns, other than S corporations, was 1.4% (up from 1.3%). Audit rates for C corporations varied by size (see box below). For partnership and S corp returns, the audit rate was 0.4%, the same as the prior year.

Math errors

Of the roughly 10.5 million math error notices the IRS issued for individual 2009 ­re­­turns, 60.8% were attributable to the Making Work Pay Credit (MWPC). Of the total math error notices, 9% were for errors in calculating other taxes—including errors relating to self-­employment tax, alternative minimum tax and household em­ploy­ment tax—while 4.9% were ­related to exemp­tions, 4.4% to the EIC, 4.1% to the standard/item­ized deduction and 1.3% to the first-time homebuyer credit.

Penalties

In 2009, the IRS assessed 27.1 million civil penalties against individual taxpayers (up from 26.4 million civil penalties assessed in the previous year. Of the 2010 penalties, 57.3% were assessed for failure to pay, 27.3% for underpayment of estimated tax and 13% for delinquency. For business taxpayers, a total of 1,145,931 civil penalty assessments were made (up from 970,098). Of those, 42.1% were assessments for failure to pay or underpayment of estimated tax.

Offers-in-compromise

In 2010, 57,000 offers-in-compromise were received by the IRS (up from 52,000). Of those, 14,000 were accepted (up from 11,000).

Tip: This data can help you pinpoint potential “trouble spots.”

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