Continuing a downward trend from the past year, 2018 saw 7% fewer IRS audits of tax returns than the amount that were audited in 2017.
150 million personal tax returns filed for the 2017 tax year. Of that amount 892,000 were audited representing only 0.59% of all personal tax returns being filed. This rate is the lowest since 2002. Of the amount of personal tax returns audited for the 2017 tax year, only $169,000 were field audits, where an IRS agent met directly with a taxpayer or the taxpayer’s rep. The remainder of the audits were via a letter received by taxpayers from the IRS and did not involve a face to face meeting with an IRS agent. As a result of the IRS audits of 2017 personal tax returns, an additional $9.1 billions dollars of taxes were assessed, or approximately $10,000 per audit.
The 2017 personal tax returns most scrutinized by the IRS in 2018 were as follows:
- Tax returns that included a Schedule C (sole proprietor) that reported gross receipts in excess of $100,000. 2% of those tax returns were audited.
- Tax returns reporting total income in excess of $1,000,000. 2% of those tax returns were audited.
- International tax returns that were filed. 4% of those tax returns were audited.
The lowest audit rate in 2018 were audits of S-corporation and partnership tax returns. Nearly 9 million tax returns for 2017 in this category were filed in 2018. The audit rate for these tax filings was only 0.2%. However, this low rate for these business tax returns is expected to change in the years going forward. The IRS plans to increase audits of shareholder basis that are recorded as part of these tax returns. The IRS focus will be on shareholder basis tracking. The IRS concern is a lack of taxpayer compliance regarding shareholder distributions and shareholder pass through losses which may be in excess of basis. Both of these items result in an under-reporting of personal income by taxpayers.
Why the continued decrease in IRS audits? The primary reason is told via the budget. In 2010 the IRS operating costs slightly exceeded $14 billion. However, the IRS has seen their budget decrease by 17% over the past 8 year. A smaller budget has resulted in a smaller IRS work force available to conduct IRS audits. The decrease in IRS employees is 15% since 2013. Will the downward trend continue? Unless, the IRS budget is increased in the next few years and staffing is increased as well, taxpayers should breathe a sigh of relief and shouldn’t see much of an increase in the audit rates of tax returns in the near future.