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As in the past, PK Law reports on the Internal Revenue Service’s (“IRS”) data book (IR 2017-69) regarding a taxpayer’s chances of undergoing an audit. The annual data book reflects data collected during the fiscal year 2016 (“FY 2016”, October 1, 2015 to September 30, 2016).

During FY 2016, the IRS processed over 244.2 million returns and supplemental documents and examined 0.6% of all returns filed in Calendar Year (CY) 2015, about 0.7% of all individual income tax returns filed in CY 2015, and 1.1% of corporation income tax returns (excluding S corporation returns). Overall, and probably without surprise, in FY 2016, individual income tax returns in higher adjusted gross income (“AGI”) classes were more likely to be examined than returns in lower AGI classes.

Of the 1,034,955 individual income tax returns audited in FY 2016, approximately one-third were selected for examination based on an earned income tax credit (“EITC”) claim. Only about one-quarter of the individual audits were conducted “in the field”. The balance of the individual audits were correspondence audits.

The following are selected audit rates:

  • For business returns (for individuals not claiming the EITC and for other than farm returns) reflecting total gross receipts of $100,000 to $200,000, 2.2% of returns were audited in FY 2016, down from 2.5% in FY 2015.
  • For business returns (for individuals not claiming the EITC and for other than farm returns) showing total gross receipts of $200,000 or more, 1.9% of returns were audited in FY 2016, a decrease from 2% in FY 2015.
  • Of the returns showing farm (Schedule F) income, 0.4% were audited in FY 2016 versus 0.3% in FY 2015.

For nonbusiness returns showing total positive income of $200,000 to $1 million, 1% of returns were audited (down from 1.8% for the previous year); for business returns, 2.3% of such returns were audited (down from 2.9% for the previous year). In general, total positive income is the sum of all positive amounts shown for the various sources of income reported on the individual income tax return and, thus, excludes losses.

For FY 2016, the audit rate for returns with total positive income of $1 million or more was 5.8%, down from the 9.6% rate for FY 2015.

For all corporate returns (other than Form 1120-S), the audit rate in 2016 was 1.1% (down from 1.3% in the previous year). For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, the rate was 1%; for $1 to $5 million, the rate was 1%; and for $5 to 10 million, the rate was 1.6%. For FY 2015, the percentages were, respectively, 1.2%; 1.1%; and 1.5%.

The IRS notes that “In the last five years as the agency’s budget has been reduced, the IRS has lost almost 15 percent of its workers. Key measures of enforcement activity, including audit rates, have also declined in several categories.” With further budget cuts looming, enforcement may become less likely except for higher earning taxpayers, even whose audit rates are nonetheless declining.

PK Law business and tax attorneys can assist with tax questions and audits. Contact a PK Tax Attorney for guidance in those areas.

This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.