New IRS data book reveals audit rates

Everyone wants to know, “what are my chances of being audited by the IRS?” The IRS keeps its audit criteria extremely confidential but every year it reveals statistics that give us some insights.  The IRS recently published its 2007 Data Book. The statistics paint a picture of the types of taxpayers the IRS is auditing and the types of audits it is performing. 

Individuals

When most people think of audits, they picture an IRS agent coming to their home or place of business. The reality is much different. Face-to-face audits are actually quite rare.  Most audits, indeed the majority, are correspondence audits. The IRS’s own statistics confirm this.

The IRS audited roughly 1.3 million individual returns in Fiscal Year (FY) 2007 (that’s October 1, 2006 to September 30, 2007). Approximately one million of these audits were correspondence audits.

One million sounds like a lot of audits. When you compare it to the number of returns the IRS receives, the number is very small. Every year, roughly 130 million returns from individuals are filed with the IRS. In FY 2007, the IRS audited one percent of these returns, which was up from 0.97 percent in FY 2006.

Businesses

Traditionally, the IRS has been more aggressive in auditing businesses than individuals. Looking at the 2007 statistics, we can see some trends in business audits.

One of the biggest jumps in business audits involves S corporations. Audits of S corporations increased significantly in FY 2007 compared to FY 2006. The audit rate for S corporations in FY 2007 was 0.50 percent. The audit rate for S corporations in FY 2006 was 0.38 percent.

Partnership audits also increased from FY 2006 to FY 2007. In FY 2006, the audit rate for partnerships was 0.36 percent. In FY 2007, it was 0.40 percent.

The IRS has been paying close attention to S corporations and partnerships in recent years. In fact, it is expected to release the results of a special audit study it conducted on S corporations and partnerships sometime this year. 

The IRS divides it audit rates for corporations based on the size of the corporation. In FY 2007, the audit rate for corporations with less than $10 million of assets was 0.90 percent. The audit rate for corporations with $10 million or more in assets was 16.8 percent. Historically, large corporations have had the highest audit rates.

These statistics are just a snapshot of the IRS’s audits.  If you’d like more information, don’t hesitate to contact our office.