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Tax audit rate for those earning $1 million increases

A recent report from the Internal Revenue Service contained mixed news overall: a small drop in the number of individual tax returns audited in fiscal year 2015, but a slight increase in the review of business filings.

Enforcement revenue fell again from approximately $57 billion to $54 billion. This was not a surprise as the total number of employees working in collections and enforcement dropped to 17,208 from a high of 22,710 back in 2000. The budget constraints have required that the agency prioritize its efforts.

$1 Million threshold

The taxpayers who were most likely to receive the scrutiny of a tax audit in 2015 were those with the highest incomes. The likelihood of an audit for these households increased from 7.50 percent to almost 10 percent in 2015.

This was the largest jump in any income bracket. When your household income surpasses this threshold, you need to be aware of the heightened risk.

Budgetary restraints at the Service have shifted the general type of audit from the traditional face-to-face review to correspondence audits through the mail. They also mean it is harder to reach a service representative at the Service. These factors have made it even more important to bring in the assistance of a tax attorney to review your situation, deal with the Service and resolve the issue as quickly as possible.

Other income brackets generally saw small decreases. For instance, the coverage rate for those who reported earnings of more than $200,000 dropped a tenth of a percent to 2.61 percent.

Partnerships and S corporations

On the business side, the Service renewed its focus on flow through entities that pass profits to individuals and bypass corporate taxes. The coverage rate on partnership tax returns increased, but remains rather low at .51 percent in 2015. S corporations also increased but still have a lower rate of review at .40 percent.

These audits are usually more complex. They must be handled carefully or could even trigger tax audits of the individual returns of partners or shareholders.

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