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Worker, Homeownership, and Business Assistance Act of 2009

Chances of being audited

American Recovery &
Reinvestment Act of 2009

   Part I - Businesses
   Part II
   Part III

   Part IV - Individuals
   Part V - Health Care

   Part VI - Energy Credits

Debt Forgiveness Rules
New Vehicle Tax Deduction
FY 2010 Budget Proposal
Net Operating Loss Planning
 Stabilization Tax Act
2008 Stabilization Tax Act
2008 Tax Act Key Changes
2009 Business Mileage Rate
IRA Tax Strategies
IRA/Roth Rollover
HSA 2009 Rates
Abandoned Securities
Partnership Fringe Benefits
2008 Individual Tax Changes
Zero Capital Gain Tax in 2008
Recent Tax Developments 2008
2008 Non-Business Tax Changes
2008 Recent Tax Developments
2008 Tax Stimulus Package
2008 Tax Stimulus Update
2008 Tax Stimulus - More Info
2007 Tax Law Changes
2007 Mortgage Forgiveness Act
2007 Technical Corrections Act
Prepaid Mortgage Ins Premiums
LLC and Employment Taxes
Spousal Partnership Rules
S Corporation Name Change
Payroll Taxes Recurring Item
HSA Comparability

What are your chances for being audited?

The Internal Revenue Service (IRS) has issued its annual data book, which provides statistical data on its 2009 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. The figures and percentages in this article compare returns filed in calendar year 2008 and audited in 2009 to returns filed in calendar year 2007 and audited in 2008.

Your chances?

Of the 138,788,744 total individual income tax returns with a filing requirement (this excludes returns filed only to receive an economic stimulus payment), 1,425,888 were audited. This works out to roughly 1%, the same percentage as for the previous year. Of the total number of individual income tax returns audited in 2009, 508,180 (35.64%) were for returns with an earned income tax credit (EITC) claim, roughly the same as for 2008.

Of the audits made, only 22.8% were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.1 %) were correspondence audits. These percentages are comparable to those for 2008.

Following are the selected audit rates for individuals not claiming the EITC:

... For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.2% of returns were audited in 2009, versus 3.8% in 2008.

... For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.2% of returns were audited in 2009, versus 3.1% in 2008.

... Of the returns showing farm (Schedule F) income, .3% were audited in 2009 versus .6% in 2008.

... For returns showing total positive income of $200,000 to $1 million, 2.3% of returns not showing business activity were audited, and 3.1% of returns showing business activity were audited; for 2008, these percentages were 2.6% and 2.8% respectively.

... For 2009, the audit rate for returns with total positive income of $1 million or more was 6.4%, versus 5.6% in 2008.

Not surprisingly, examination coverage increases for higher income earners, but coverage was less than it was for the prior year. For example, the percentage was .67% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from .98% for 2008), 1.86% for those with $200,000 to $500,000 of AGI (down slightly from 1.92% for 2008), and 5.35% for those with $1 to $2 million of AGI (down from 6.47% for 2008).

The audit rates for business returns were as follows:

... For all corporations (except S-corporations), 1.3% were audited, which is the same percentage as for the year before.

... For small corporations with total assets of: $250,000 to $1 million, 1.3%; $1-$5 million, 1.8%; and $5-10 million, 2.7%. For 2008, the percentages were, respectively, 1.4%, 2%, and 3.1%.

... For large corporations, those with total assets of $10 million or more, the overall audit rate was 14.5%, down from 15.3% for 2008. The audit rate for these corporations increased with the size of the enti¬ty. For example, the audit rates were 10.1 % for those with total assets of $10-$50 million (versus 11.7% for 2008); 15.8% for those with $250-$500 million (versus 14.2% for 2008); 48.7% for those with $5-20 billion (versus 64.2% for 2008), and for both fiscal years, 100% for those with $20 billion or more. Actually, the audit rate for 2009 (or for 2008) may exceed 100% of the returns filed in calendar year 2008 (or calendar year 2007), since examinations may be conducted on returns filed in prior calendar years.

... For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.

IRS's activity on other fronts.

Here is a roundup of some of the other valuable information carried in the new IRS Data Book.

Number of returns filed. The number of business returns filed in 2009 versus those filed in 2008 illustrates the growing popularity of pass-throughs. The number of partnership returns filed (Form 1065) grew by 7.8% and the number of S corporation returns (Form 1120S) grew by 1.3%. By contrast, the number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.4%.

The number of individual income tax returns (Forms 1040, 1040A, 1040EZ, 1040EZ-T) in 2009 versus 2008 fell 6.7%, from 153,308,000 to 142,983,000. This was no doubt due to the general contraction of economic activity and growth in the ranks of the unemployed.

Math errors on individual returns. Of the 13.48 million math error notices sent out in 2008 return, 74.4% were attributable to the Code Sec. 6428 recovery rebate credit which on the 2008 return provided for a refundable recovery rebate credit to an eligible individual - one other than a nonresident individual, an individual who could be a dependent, or an estate or trust. Any economic stimulus payment the taxpayer received in 2008 reduced the recovery rebate credit.

Of the total math error notices, 6.6% were for tax calculation/other taxes (which includes errors made relating to self-employment tax, alternative minimum tax, and household employment tax), 4.2% relating to exemption number/amount, 3.6% relating to the earned income tax credit, and 3.4% relating to the standard/itemized deduction.

Penalties. In 2009, IRS assessed 26.387 million civil penalties against individual taxpayers, down from 30.223 million civil penalties assessed in the previous year. Of the 2009 assessments, the "top three" penalties in percentage terms were 54.71% for failure to pay, 28.67% for underpayment of estimated tax, and 14.42% for delinquency.

On the business side, there were 970,098 civil penalty assessments, and 55.8% of these assessments was for either failure to pay or underpayment of estimated tax. (The data was organized differently for 2008 so comparisons can't be made to the previous year.)

Offers in compromise. In 2009 52,000 offers in compromise were received by IRS, and 11,000 (26%) were accepted. These figures reversed declines in the two preceding years.

Criminal cases. IRS initiated 4,121 criminal investigations in 2009. There were 2,570 referrals for prosecution and 2,105 convictions. Of those sentenced, 81.2% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in 2008, IRS initiated 3,749 criminal investigations, there were 2,785 referrals for prosecution. Of those sentenced, 80.9% were incarcerated.