Kiplinger on Tax Audits

The IRS audit rate continues its downward spiral, agency statistics show.

Last year’s individual IRS audit rate was 0.6%...one out of every 167 returns.

The bulk were correspondence exams done by mail…focusing on one or two issues.  2017 marked the sixth consecutive year that the IRS audit index has gone down.

Despite the overall low exam rate, some individuals got more IRS attention:

Filers claiming the earned income tax credit…over 1% were audited last year.  Sole proprietors.  The Service examined between 1% and 2.1% of taxpayers who ran a business and attached Schedule C reporting over $125,000 of gross receipts.

Upper-incomers.  Individuals with incomes between $200,000 and $1 million and no Schedule C attached had a 0.8% audit rate…1.6% for Schedule C filers.

Millionaires saw the most scrutiny.  4.4% of tax returns reporting incomes of at least $1 million were audited by the Service in 2017, down from 5.83% in 2016.

The 2017 overall exam rate for regular corporations (C corps) was 1%.  Corporations reporting assets of $5 million or more had greater audit coverage.

Exam rates for partnerships and S corporations were 0.4% and 0.3%.

The Service does a poor job of picking pass-through returns for audit.  Per agency statistics, 43% of partnership exams and 29% of S corporation audits that were conducted by agents in the field last year resulted in no change to taxes.

Ditto on its field audits of regular corporations…a 31% no-change rate.  Compare these figures with the 8% no-change rate on field exams of individuals.