Your chances of having your tax return audited is now the lowest in years. At least that is what the latest headlines are telling you. In 2013, the IRS audited fewer returns than they have since 2005, and the number of individual returns is expected to drop again this year
But what are the headlines not telling you?
Your chances of getting audited?
For individuals, audit rates differ by income - In 2013, the IRS audited 0.9% of individuals who earned less then $200,000 a year. 3.26% of returns with income greater than $200,000 were audited and 10.9% for those with income greater than $1 million. So the people who got the lions share of the tax increase are getting audited most often.
For Corporations, the IRS tracks audit statistics based upon asset size. An average of 0.6% of corporate tax returns were audited. The rate was slighty higher for small corporations (assets under $10 million) at .95%. The audit rate was much higher for large corporations - approximately 16% of corporations with assets over 10 millions were audited.
With that being said....
Audits of Large Partnerships are on the Rise - Slighty
Large partnerships are described as those with 100 or more direct partners and $100 million or more in assets. The number of large partnerships has increased over 200% from 2002 to 2011.
Types of audits for Corporations and Partnerships
The IRS has two different types of audits - field audits & campus functions audits.
Field Audits
A field audit is when the IRS does a complete review of the company's books, records, ect. This type of audit increased almost 300% from 2007-2013. These audits are a lot of work and you have to understand the tax code for this type of audit. For our clients, we always recommend a field audit occur at our offices. This keeps the auditor away from your office where they can talk with employees and ask those not knowledgeable with the tax code questions that will make this type of audit spiral out of control.
Campus Function Audit
A campus function audit is unlike a field audit. It generally does not include a review of the books and records of the partnerships tax return but instead is opened to pass through the partnership return to the related partners' returns - meaning those with who are a partner in a large partnership now have a higher chance of being audited. This type of audit increased over 300% from 2007 to 2013.
So, while the number of large partnerships being audited has increased significantly, in 2012 less than 1% were audited - this means over 99% of the hedge funds, private equity funds, master limited partnerships and publicly traded partnerships in this country are nearly audit-free.
Types of Audits for Individuals
Correspondence Audits
Correspondence audits are typically auditing one or two items on your tax return. They are difficult for the taxpayer if you do not understand what they are requesting. In my experience, these audits are very slow in processing and require excellent writing skills and thorough documentation submission.
Audit at the IRS Office
This is my audit from hell. Drag a box in and get quizzed by the auditor. You have to produce your documents quickly and hopefully your records are in excellent order. You do not want this type of audit if you are a business.
Field Audit
These audits are rare on individual returns. If a field audit is ever requested, always have the audit at your CPA's office.
Why are the Audit Rates So Low?
The IRS has said the recent budget cuts have forced it to cut back on audits and they are relying on technology more to catch potentials problems. Since 2010, the IRS budget has been reduced by nearly $900 million and they have about 10,000 fewer employees; affecting taxpayer services and enforcements.
Don't Be Cheap
Our clients are successful in large part because they spend their money wisely. But when you are faced with an audit, don't be cheap. Get a professional to represent you. Remember, the IRS is sending out an agent who is thoroughly trained in the tax code in hopes of getting a tax payer who has no professional representation and is to cheap too get it. That is when the taxpayer is easily separated from his money.