Are you in danger of getting audited?
So what are your chances of being audited? Well, even though only .8% of returns get audited, how you structure yourself and your business can significantly increase your exposure.
For instance, the most common form of legal entity for small business today is the Limited Liability Company (LLC). For tax purposes, if the LLC is owned by a single indiviidual, you will be filing a Schedule C Sole proprietor tax return, the most common type of return that gets audited. To minimize your exposure, consider operating as a corporation, where you receive a W-2 at the end of the year, and the business files it’s own tax returns.
The IRS is also pretty savvy at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.
What other issues are the audits focusing on? Here is a roundup of selected audit rates:
o Earned Income Tax Credit (EITC) – EITC continues to be an area of high taxpayer fraud so it stands to reason these returns were and will be the subject of high audit rates. Of the total number of returns audited, 538,562 (34.6%) were selected on the basis of an earned income tax credit claim.
The following statistics apply to non-EITC returns including these schedules:
- Individual Returns without a Schedule C, E, F, 2106 –0.4%
- Individual Returns with a Schedule E or 2106 – 1.0%
- Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return:
- Under $25,000 – 1.0%
- $25,000 to $100,000 – 2.3%
- $100,000 to $200,000 – 3.0%
- $200,000 or more – 2.7%
The IRS also focuses their audits on higher-income returns, as evidenced by the following statistics based on total positive income (TPI):
- Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5%
- Business returns with a TPI of at least $200,000 and under $1 million – 3.2%
- All returns with a TPI of $1 million or more – 10.8%
For returns other than individual returns, the audit rates by type were:
- Estate and trust income tax returns – 0.1%
- Corporations with less than $10 million of assets – 1.0%
- Corporations with $10 million or more of assets – 15.8%
- S corporations – 0.4%
- Partnerships – 0.4%
- Estate tax returns – 11.6%
- Gift tax returns – 1.1%
Because of the IRS’s high success rate for their audit programs, it is probably not wise for a taxpayer to represent themselves during an audit. This is best left to business tax services who understand the audit process and can address potential issues that may arise. So, if you receive an audit notice, the next call you make should be to our office.
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Copyright 2015 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire.
