Practical IRS Tax Insights – June 2019 Newsletter
The second wave of audit letters from the IRS should be out. Have you received an IRS letter yet? I’ve yet to see anyone follow my 4 part checklist for avoiding an audit, unless it was one of my own clients. It’s sad that 90% of people who come to me for audit representation could have prevented an audit if they would have had me prepare their tax return in the first place. I’m always happy to do a paid consultation and explain the 4 part plan in detail!
IRS audits continue their downward spiral. Last year’s overall exam rate was 0.5%. The agency did close to 70,000 fewer audits in 2018 when compared with 2017, representing a 7% drop.
The 2018 individual audit rate was 0.59%, which translates into one out of every 170 returns. 81% of these audits were correspondence exams done by mail, usually focusing on a few simple issues. The rest involved in-person meetings at IRS offices or field exams conducted at the taxpayer’s business.
Despite the low exam rate, some individuals get heightened IRS attention: Filers claiming the earned income tax credit. IRS audited 1.4% of returns filed by taxpayers with incomes of $25,000 or less who took this popular tax break.
Sole proprietors. The agency examined between 0.9% and 2.4% of taxpayers
ho ran a business and attached Schedule C reporting over $25,000 of gross receipts.
Upper-incomers. Individuals with incomes between $200,000 and $1 million had a 0.6% audit rate…1.4% for Schedule C filers. These figures are down a bit from 2017, when audit coverage for these taxpayers was 0.8% and 1.6%, respectively.
Taxpayers filing returns that report net losses had a 2% audit rate.
Millionaires continue to see the most scrutiny. 3.2% of tax returns reporting incomes of at least $1 million were audited by the Revenue Service in 2018.
But their audit coverage is plummeting more than any other income class. In 2017, the agency examined 4.4% of all returns filed by these wealthy individuals. People lucky enough to be super-rich…those with incomes of $10 million or more… had an audit rate of 6.67% in 2018, a deep slide from the prior year’s 14.52% rate.
The low individual audit rate doesn’t necessarily tell the full story. IRS questions many more individual taxpayers. It doesn’t count as audits computer-generated CP2000 notices about mismatches between income and deductions reported on tax returns and data on third-party information returns, such as W-2s, 1099s and 1098s. Also not included are math error corrections and other measures that may require taxpayers to send in documents or other information to the agency, and may feel like an audit for many individuals. When these corrective procedures are factored in, the agency’s coverage rate jumps, as it did in 2017, to close to 6%.
Fewer partnerships, C corporations and S corporations are being audited.
The 2018 overall exam rate for C corps was 0.9%. Companies reporting assets of $5 million or more had much greater audit coverage, ranging from 4.6% to 49.3%.
Exam rates for partnerships and S corporations dropped to a measly 0.2%.
IRS needs to do a much better job of picking business returns for audit. Per agency statistics, 40% of partnership exams, 29% of S corporation audits and 32% of C corp audits conducted by field agents resulted in no change to taxes. Compare these figures with the 8% no-change rate on field exams of individuals.