The IRS said it audited more than 1million individuals in fiscal 2012 for the sixth year in a row, collecting more than $50 billion for the third consecutive year. While those numbers might seem high, audit rates are really quite low. The IRS’ audit rate is roughly 1.03 % of all tax returns filed.
The IRS generally has kept up its audit activity despite a $305,000,000 budget cut that reduced full-time staffing by 8 % over the past two years, including 6 % in the enforcement area over the past year. That 1.03 % audit rate last year was almost double the level of a decade earlier.
Certain activities and behaviors can put you in greater danger of being Audited by the IRS.
High income is one. “Audits in the upper-income ranges remained substantially higher than other categories,” the IRS stated in a recent report. Of people with less than $200,000 in income, 0.94 % faced an audit. That jumped to 12.14 % of those earning at least $1 million.
Certain business categories are another. The IRS said it’s taking a closer look at “flow-through entities,” which include partnerships and Subchapter-S corporations. Audit rates in both areas have increased in recent years, though they both remain slightly lower than 0.5 %.
Then there are big corporations. Of those with assets of at least $250,000, more than 29% got audited in fiscal 2012, which ended last Sept. 30.
Self-employed individuals who file Schedule C also face an elevated risk of audit. One curiosity: Those Schedule-C filers earning between $100,000 and $200,000 actually had worse odds, with 4.3% of returns audited, compared with those earning more money, where the audit rate was 3.8%.
The IRS has gotten more reward-focused about the taxpayers selected for audit.
“Like all smart businesses, the IRS wants to turn a profit these days,” according to a commentary by the National Association of Enrolled Agents, an organization of licensed of return-preparation specialists.“Currently, tax returns are selected for audit based on the chance that the IRS will find enough errors or missing income to generate additional taxes — and perhaps penalty and interest.”
We will continue this discussion in Are You an IRS Audit Target? Part II.
Are you Being Audited by the IRS?
Contact the Tax Lawyers at Marini & Associates, P.A.
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The details of the IRS discriminant-function program are a secret. It includes more than just raw numbers. For example, if your tax return shows a ZIP code from a low-income neighborhood and you deduct a charitable contribution of $10,000, regardless of your adjusted gross income, the computer is going to notice. That doesn't mean you're going to be audited, but the probability has soared.
Want to play the audit game? The IRS audited 1,581,394 individual tax returns in the fiscal year that ended Sept. 30, 2010. That was a rate of 1.1%, up from 1.0% the year before. But only 22% of the fiscal 2010 examinations were face-to-face audits. The rest were correspondence exams.
Of returns showing income of $200,000 or more, the audit rate was 3.1% in fiscal 2010, up from 2.8% the year before.
Unless you fall within the specific targets or have substantial income, I'm betting that the probability of an IRS audit will go down this year. This is one of those lotteries that you don't want to win. How lucky do you feel?
Several approaches can improve the odds that you won’t be caught in an audit. Some are surprisingly simple. These include fact-checking names and Social Security numbers for you, your spouse and dependents and filling out accurate occupational descriptions for you and your spouse.
Other tips cited by the NAEA include accurately reporting“all the income that the IRS knows about,” as IRS computers will match all W-2s, 1099s and other tax documents for you with your Social Security number.
“When you receive a substantial part of your earnings in cash or without paperwork, that doesn’t mean you’re off the hook,” the group adds. “IRS computers look at certain aspects of your lifestyle and will tag you for audit if your visible income is much too low to match your ZIP code or family size.”
CCH cites several types of deductions that raise red flags because they aren’t allowable. These include trying to claim a loss on your home, deducting excessive moving expenses and trying to claim medical deductions for unnecessary cosmetic surgeries.
Yet nothing seems to draw scrutiny like the adoption credit. A staggering 69 % of such returns were audited last year, with the examination process extending four months on average.
Even if you're not in one of the above target groups, you're not necessarily off the hook. Some returns are randomly selected. But most "winners" of the audit lottery are identified by the tax agency's discriminant-function program.
Under that program, IRS has created a number of composite hypothetical taxpayers. The agency's computers compare your return with those of the hypothetical taxpayers. The further your return is from the statistical norms, the more the computer clicks. And, the more the computer clicks, the higher the probability your return will be kicked out for review.
The table below gives average itemized deductions for 2009 returns filed in 2010. If your deductions are above average, the IRS is more likely to notice you.
US taxpayers' average deductions
Adjusted gross income
Interest
Taxes
Charity
Medical
Under $15,000
$8,838
$3,337
$1,496
$8,414
$15,000-$29,999
8,434
3,184
2,048
7,783
$30,000-$49,999
8,699
3,943
2,274
7,028
$50,000-$99,999
10,153
6,247
2,775
7,269
$100,000-$199,999
13,456
11,069
3,888
9,269
$200,000-$249,999
17,572
18,524
5,947
21,599
$250,000 and up
25,227
48,317
18,488
38,149
Regardless of the averages, deduct only the expenses you actually incurred. If you spent more than the average, claim it. Just be prepared to substantiate your numbers.
Are you Being Audited by the IRS?
Contact the Tax Lawyers at Marini & Associates, P.A.
What do Marion Barry, Rob Lowe, Wyclef Jean, Vera Wang and Lindsay Lohan have in common? IRS trouble!
No matter how famous, talented or connected, whether actor, designer, politician or musician, in the eyes of the Internal Revenue Service they are simply “taxpayers.”
The average taxpayer who chooses a withholding status and then turns tax collection over to the HR department for payroll withdrawal often scratches his or her head at the very wealthy who can’t seem to get a handle on paying their taxes.
Keep in mind that many of these famous tax delinquents are independent contractors or self-employed, making their taxes quite a bit more challenging; not to mention the difficulty of correctly reporting income earned in a variety of states. And while many in high income brackets employ a business manager, not all of those managers have tax expertise, especially when they are spouses or other family members.
Many celebs that are getting good tax advice to form a corporation in order to shield themselves from personal liability, and to protect personal assets from corporate creditors. In addition to lowering risk, there are numerous tax advantages to incorporation.
But it’s probably safe to say that most celebrities prefer not to spend a lot of time thinking about taxes (not unlike the majority of the American public).
Celebrities and non-celebrities alike should contact a licensed tax practitioner or Tax Attorney to ensure they don’t wind up paying more than they need to or find themselves sharing a cell with Wesley Snipes!
Need Tax Advice?
Contact the Tax Lawyers at Marini & Associates, P.A.
The Schedule UTP asks for information about tax positions that affect the U.S. federal income tax liabilities of certain corporations that issue or are included in audited financial statements and have assets that equal or exceed $50 million.
The Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which two conditions are satisfied:
1.The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year.
2.Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position.
A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared.
The statistics show that:
Schedule UTP TY2011 Filing Statistics (as of December 2012)
1,783 taxpayers filed Schedule UTP for TY2011. (This compares to 1,761 taxpayers at the same time last year. Total returns filed and number of issues disclosed will increase as late year filters and other returns are filed)
83% of all returns filed with Schedule UTP were filed by IC taxpayers.
4,120 tax positions have been disclosed on Schedule UTPs for TY 2011.
Returns filed by CIC taxpayers with a Schedule UTP averaged 3.8 uncertain tax positions per Schedule, while returns filed by IC taxpayers with a Schedule UTP averaged 2.0 positions per Schedule.
Note that beginning with TY2011, corporations are required to report tax positions taken in the prior year on Part II of Schedule UTP if that position was not reported on the prior year Schedule. As such, we expect a slight increase in the average number of total positions reported per taxpayer. We will at a later date begin to break out the total number of positions reported between current year and prior year positions.
47% of all Schedule UTP returns filed included only one uncertain tax position.
IRS is still compiling the data regarding the top code sections reported with the TY2011 filings, although we do not expect much variation from TY2010. That information will be posted as soon as it becomes available.
For comparison, the TY2010 stats were: Schedule UTP TY2010 Filing Statistics
2,356 taxpayers filed Schedule UTP for TY2010.
79% of all returns filed with Schedule UTP were filed by IC taxpayers.
4,712 tax positions were disclosed on Schedule UTPs for TY 2010.
Returns filed by CIC taxpayers with a Schedule UTP averaged 3.1 uncertain tax positions per Schedule, while returns filed by IC taxpayers with a Schedule UTP averaged 1.9 positions per Schedule.
49% of all Schedule UTP returns filed included only one uncertain tax position.
The top three code sections reported by UTP filers are IRC 41, 482 and 162. Analysis of UTP filers’ concise descriptions revealed that the third highest primary IRC section is actually IRC 263 capitalization.
Transfer Pricing and Research Credit comprise 43% of all disclosed uncertain tax positions.
The IRS generally has kept up its audit activity despite a $305,000,000 budget cut that reduced full-time staffing by 8 % over the past two years, including 6 % in the enforcement area over the past year. That 1.03 % audit rate last year was almost double the level of a decade earlier.
Then there are big corporations. Of those with assets of at least $250,000, more than 29% got audited in fiscal 2012, which ended last Sept. 30.
