22 March 2006

IRS Audit Statistics

Audit rates are based on periodic comprehensive examinations of large samples of taxpayers of each type to determine which examinations are most likely to produce additional IRS revenues. The latest numbers show the returns most likely to fail to report all taxes due with the return. Some returns like partnerships, S corporations, gift taxes and fiduciary income tax returns, are low primarily because they are usually information returns upon which no taxes are due.

The percentage of returns audited in 2005 by type, illustrates who is most and least likely to get their tax due amounts wrong (TPI stands for total positive income):

C Corporations with assets $10,000,000 and over----------20.02%
Estate tax (usually estates $2,000,000 in value or more)--8.20%
Sole proprietorships under $25,000 in gross receipts------3.68%
Sole proprietorships $100,000+ of gross receipts----------3.65%
Sole proprietorships $25,000 to $100,000 gross receipts---2.21%
Individual Returns Under $25,000 TPI (not 1040A)----------1.48%
Individual Returns $100,000+ TPI--------------------------1.19%
Farms with $100,000+ Gross Receipts-----------------------1.01%
Gift Tax Returns------------------------------------------0.81%
C Corporations under $10,000,000 in assets----------------0.79%
Individual Returns $25,000 to $49,999 TPI-----------------0.60%
Individual Returns $50,000 to $99,999 TPI-----------------0.57%
Individual Returns under $25,000 on Form 1040A------------0.52%
Farms with under $100,000 gross receipts------------------0.48%
S Corporations--------------------------------------------0.30%
Fiduciary (Estate and Trust Income)-----------------------0.18%

There were 1,215,308 individual income tax returns were audited during fiscal year 2005, out of 130.6 million returns. Of those, 521,872 (42.9%) were selected on the basis of an earned income tax credit (EITC) claim, which accounts for the high audit rate of returns with under $25,000 of total positive income.

About 20% of the audits were conducted in person, while about 80% were conducted by mail. Automatic computerized calculation corrections that don't change any of the factual basis for a return, but change the tax due, don't count as audits in the statistics above.

More information is available at the IRS website in the 2005 Data Book (Pub 55B, March 2006).

Bottom Line: The earned income tax credit is too complicated for a great many taxpayers resulting in a plethora of minor IRS hassles. And, otherwise, big business, the wealthy and the self-employed account for most tax mischief.

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