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April 3, 2005 - What are your chances of being audited?

The Internal Revenue Service has issued its annual data book, which provides statistical data on its fiscal 2004 activities. Following is a summary of the Internal Revenue Service’s audit statistics for 2004.

What are your chances of being audited?

  • Individuals. A total of 1,007,874 individual income tax returns were audited during fiscal year 2004 (October 1, 2003 through September 30, 2004) out of a total of 130.1 million individual returns that were filed in calendar year 2003. This works out to 0.77% of all individual returns that were filed. In the prior fiscal year, 849,296 returns were audited; the audit rate was about 0.65%. Of the total number of returns audited, 487,461 (48.3%) claimed an earned income tax credit (EITC). Only 19.3% of the audits were conducted by revenue agents, tax auditors, and tax compliance officers.
  • Farm Operations. The number of individual returns showing total gross receipts from farming (Schedule F) of $100,000 or more dropped slightly from 2003. However, 4,003 of these returns were audited in 2004 compared to only 2,076 in 2003. Audits of smaller farm operations (under $100,000 of total gross receipts) also increased significantly, from 1,997 in 2003 to 3,104 in 2004.
  • Corporations. Year-over-year, the number of corporations (including S corporations) audited dropped by almost 25%, from 30,700 in 2003 to 23,499 in 2004. Only 0.32% of small corporations (assets under $10 million) were audited; for 2003, the audit rate was 0.58%. For large corporations (assets of $10 million or more), the audit rate increased to 16.74% from 12.08% in 2003. For S corporations, the audit rate was 0.19%, down from 0.30% in 2003.
  • Estate Tax. Audits of estate tax returns dropped from 7,265 to 6,402. However, because the number of estate returns filed dropped by 23.5% year-over-year, the actual audit rate increased from 6.38% to 7.41%. The audit coverage rate for gift tax returns increased slightly, from 0.66% to 0.69%.

IRS activity on other fronts

Following is a summary of other valuable information published in the new IRS Data Book:

  • Penalties. In fiscal 2004, the IRS assessed 18.8 million civil penalties against individual taxpayers. Of these, 11.0 million (58.6%) were for failure to pay, followed by 5.2 million for underpayment of estimated tax, and 2.3 million for delinquency. There were only 225 negligence penalties assessed against individuals relating to income tax.

On the corporation side, there were a total of 660,000 penalty assessments, 82% for either failure to pay or underpayment of estimated tax. There were only 25 negligence penalties assessed for corporation income tax.

  • Offers in compromise. In fiscal 2004, 106,000 offers in compromise were received by IRS, and 20,000 (18.9%) were accepted. Over recent years, these numbers have been dropping; in 2001, 125,000 offers were submitted and 39,000 (31.2%) accepted.
  • Information returns. The IRS received a total of 1.39 billion information returns in fiscal 2004, including Forms 1098 (mortgage interest, student loan interest, and tuition), 1099 (interest, dividends, etc.), W-2 (wages), W-2G (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 3.2% were submitted on paper. Most of the information returns were filed electronically or on magnetic tape.

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