IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2008 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits), and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections.
What are the chances of being examined? A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).
Of the total number of returns audited, 503,755 (36.2%) were selected on the basis of an earned income tax credit (EITC) claim (down slightly from the 36.5% rate for FY 2007).
Only 22.3% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.7%) were correspondence audits. These percentages are about the same as they were in FY 2007.
About 1.36 million individual returns were farm returns that showed gross receipts from farming (Schedule F). Of this group, only 7,542 (0.5%) were audited in 2008.
The no-change rate (returns accepted as filed after examination) was 11% for individual returns examined by revenue agents, tax compliance officers, or tax examiners, and 15% for correspondence exams.
Here’s a roundup of selected audit rates from IRS’ latest databook. Following are the audit rates for individual nonbusiness returns that didn’t claim the earned income tax credit:
- For “selected nonbusiness returns” (includes returns without a Schedule C (nonfarm sole proprietorship), Schedule E (supplemental income and loss), Schedule F (profit or loss from farming), or Form 2106 (employee business expenses), 0.4% (same as for FY 2007).
- For returns with Schedule E or Form 2106 (excludes returns with a Schedule C, nonfarm sole proprietorship, or Schedule F, profit or loss from farming), 1.3% (up from 1.2% for FY 2007).
- For nonfarm business returns by size of total gross receipts: under $25,000, 1.2% (down from 1.3% for FY 2007); $25,000 under $100,000, 1.9% (down from 2% for FY 2007); $100,000 under $200,000, 3.8% (down from 6.2% for FY 2007); and $200,000 or more, 0.6% (down from 1.9% for FY 2007).
For returns with total positive income (TPI) of at least $200,000 and under $1 million, the audit rate was 2.6% for nonbusiness returns (down from 2% for FY 2007) and 2.8% for business returns (down from 2.9% for FY 2007). For returns with TPI of $1 million or more, the audit rate was 5.6% (down from 9.3%).
The audit rates for entities were as follows:
- Fiduciary (estate and trust income tax returns), 0.1% (the same as for FY 2007);
- Corporations with less than $10 million of assets, 1.0% (up from 0.9% for FY 2007);
- Corporations with $10 million or more of assets, 15.3% (down from 16.8% for FY 2007);
- S corporations, 0.4% (down from 0.5% for FY 2007);
- Partnerships, 0.4% (same as FY 2007);
- Estate tax returns, 8.1% (up from 7.7% for FY 2007); and
- Gift tax returns, 0.4% (down from 0.6% for FY 2007).
Penalties. In fiscal year 2008, IRS assessed 30.22 million civil penalties against individual taxpayers, up from 27.33 million civil penalties assessed in the previous year. Of the FY 2008 assessments, 17.41 million (57.6%) were for failure to pay, followed by 8.55 million (28.3%) for underpayment of estimated tax. There were 391,621 assessments (1.3%) 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, and understatement of reportable transactions under Code Sec. 6662A.
On the corporation side, there were a total of 783,864 civil penalty assessments (up from 762,718 for FY 2007), 82.6% for either failure to pay or underpayment of estimated tax.
Offers in compromise. In FY 2008, 44,000 offers in compromise were received by IRS, and 11,000 (25%) were accepted. Over recent years, these numbers have been dropping; in 2007 for example, 46,000 offers in compromise were received by IRS, and 12,000 (26%) were accepted.
Criminal cases. IRS initiated 3,749 criminal investigations in FY 2008. There were 2,785 referrals for prosecution and 2,144 convictions. Of those sentenced, 80.9% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2007, IRS initiated 4,211 criminal investigations, there were 2,837 referrals for prosecution, and of those sentenced, 81.2% were incarcerated.
Information returns. IRS received a total of 1.883 billion information returns in FY 2008, including Forms 1098 (mortgage interest, student loan interest, and tuition), 1099 (interest, dividends, etc.), 5498 (individual retirement arrangement and medical savings account), W-2 (wages), W-2 (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 2.8% were submitted on paper.
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