The IRS announced that it made strong progress in a number of key enforcement categories during FY 2006. The IRS collected a record $48.7 billion in enforcement revenues during FY 2006.
Individual Returns
Taxpayers filed 134 million US income tax returns last year (FY 2006). The total number of individual returns audited increased by over 6% to 1.3 million in 2006 from 1.2 million in 2005. This is double the number of audits completed in 2000. Audits include all types, correspondence/letter exams, IRS office visits, and field audits. This means that overall 1% of all individual returns were audited.
The IRS has noted that certain income levels have been targeted for increased enforcement efforts recently and therefore, your likelihood of an audit increases if you have income in excess of $100,000.
• Audits of individuals with income over $1,000,000 increased to 17,000 in FY 2006, an increase of 33% from the prior year level. About 1 in every 16 of these taxpayers faced an audit last year.
• Audits of individuals with incomes over $100,000 experienced 257,000 audits in FY 2006, an 18% increase from the prior year. This represents 1 in 60 taxpayers.
The audit percentage is approximately .9% of returns for taxpayers under $100,000.
Business Returns
Overall, approximately .6% of all business returns were audited in FY 2006. The IRS reported increased enforcement in the review of S corporations and partnerships while efforts involving small businesses and large corporations remained constant.
• Audits of S Corporation returns increased to 14,000, an increase of 34% over the prior year. This represents approximately .38% of returns filed in FY 2006 or 1 in every 265 returns.
• Partnership audits increased in number to 9,800 or 15% more than in FY 2005. Similar to S Corporations, approximately .36% of all partnership returns were audited or 1 in every 278 returns.
• 19% of large (assets of $10 million or more) corporations received an audit in FY 2006.
• Further tax-exempt organizations were not exempt from increasing enforcement efforts with 7,000 returns audited, an increase of 43% of the prior year.
Types of IRS Audits
The increase in audits has come in all forms.
• Correspondence Audits or letter audits are the simplest type of IRS audit. The taxpayer needs to provide the information requested for the specific items in question.
• IRS Office Visit: The taxpayer is asked to meet in the local IRS Office to handle the tax issue.
• IRS Field Audit: This is the most complete IRS audit occurring on site of the business or with an individual.
• National Research Program: This type of audit is done for statistical and research purposes only.
Protect Yourself
With enforcement efforts on the rise, it is important to maintain proper documentation for all filed tax returns for at least three years. The IRS can typically go back 3 years for an audit. For example, if you filed your 2005 tax return on April 15, 2006, the last day the IRS can challenge your return is April 15, 2009.
However, if the IRS believes you have underreported your income by 25% or more, or believes there may be indication of fraud or you have not filed a return, it may go back six years or more in an audit.
Author
About Chuck Chuckuemeka
Chuck is managing partner of Chuckuemeka & Associates, a nationally focused CPA firm specializing in Accounting, Auditing, Consulting and Tax Advising.
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