What Are My Chances of Being Audited?

    With this year’s tax season coming to a close, I have to say that this is probably one of the most frequently asked questions that I will get.

    The word AUDIT and various tax forms.
    The Feared Tax Audit!
    What are Your Chances of Being “Selected”?

    So, the IRS has just come out with new data for a ten-year period. In the tables below, I’ve reproduced data for the most recent three years for selected categories. Following the table is my brief analysis of the raw data. But keep in mind that these are just broad numbers. Your chances of getting audited depends on many factors. Have only wage, interest, and capital gain income and take the standard deduction? Your chances are probably much less than indicated. Take a large charitable contribution deduction, have a Schedule C, or rental property, and your chances are likely to be higher. The same is true for business returns.

    Individual Tax Returns

    Total Individual Tax Returns

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Field Examinations                 344,152      291,643      267,076           -  8.4
    Correspondence Audits            1,060,779      950,836      961,041              1.1
    Total Exams                      1,404,931    1,242,479    1,228,117           -  1.1
    Total Returns                  145,819,388  145,236,429  146,861,217              1.1
    Percent Audited                      0.96%        0.86%        0.84%
    
    

    Income Under $200,000

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Field Examinations                 270,636      234,758      214,678           -  8.6
    Correspondence Audits              932,336      848,451      851,256              0.3
    Total Exams                      1,232,972    1,083,209    1,065,939           -  1.6
    Total Returns                  140,537,584  139,369,439  140,642,631              0.9
    Percent Audited                      0.88%        0.78%        0.76%
    
    

    Income $200,000 and Higher

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Field Examinations                  73,516       56,885       52,398           -  7.8
    Correspondence Audits               98,443      102,385      109,786              7.2 
    Total Exams                        171,959      159,270      162,184              1.8
    Total Returns                    5,281,804    5,866,000    6,218,586              6.0
    Percent Audited                      3.26%        2.71%        2.61%
    
    

    Income $1,000,000 and Higher

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Field Examinations                  19,167       15,029       13,781           -  8.3
    Correspondence Audits               20,254       19,322       25,972             34.4
    Total Exams                         39,421       34,361       39,753             15.7
    Total Returns                      291,831      458,337      416,178           -  9.2
    Percent Audited                     10.85%        7.50%        9.55%
    
    

    Business Tax Returns

    Small Corporation Tax Returns (Assets Under $10 Million)

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Returns Examined                    17,604       17,257       16,460           -  4.6
    Returns Filed in Prior CY        1,849,758    1,812,140    1,797,360           -  0.8
    Percent Audited                      0.95%        0.95%        0.92%
    
    

    Large Corporation Tax Returns (Assets $10 Million and Higher)

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Returns Examined                     9,876        7,858        7,410           -  5.7
    Returns Filed in Prior CY           62,347       64,261       66,484              3.5
    Percent Audited                     15.84%       12.23%       11.15%
    
    

    S – Corporation Tax Returns

                                       FY 2013      FY 2012      FY 2015     % chg. 2014 to 2015
    
    Returns Examined                    18,670       16,317       18,595             14.0
    Returns Filed in Prior CY        4,476,307    4,518,765    4,605,766              1.9
    Percent Audited                      0.42%        0.36%        0.40%
    
    

    Partnership Tax Returns

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Returns Examined                    14,870       15,779       19,212             27.8
    Returns Filed in Prior CY        3,550,071    3,649,385    3,766,567              3.2
    Percent Audited                      0.42%        0.43%        0.51%
    
    

    Exempt Organization Tax Returns

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Returns Examined                    10,575        9,084        6,392           - 29.6
    Returns Filed in Prior CY          771,675      765,395      787,339              2.6
    Percent Audited                      1.37%        1.06%        0.81%
    
    

    Collection

    Enforcement Actions

                                       FY 2013      FY 2014      FY 2015     % chg. 2014 to 2015
    
    Levies                           1,855,095    1,995,987    1,464,026           - 26.7
    Returns Filed in Prior CY          602,005      535,580      515,247           -  9.4
    Seizures                               547          432          426           -  1.3
    
    

    Comments and Analysis

    From 2013 to 2015 the number and percentage of returns audited has decreased, pretty much across the board. But looking deeper, audits declined from 2013 to 2014 and went up slightly in 2015. For individuals with income of less than $1 million, the percent audited decreased from 2014 to 2015, mostly at the lower end. Individuals with income of $1 million or more saw an increase from 2014 to 2015, but still below the percentage in 2013. If your income is less than $200,000, your audit chances are 3/4 of 1 percent; $200,000 to $1 million your chances go up to 2.6 percent; over $1 million they’re almost 10%. In general, field audits (which involve a visit from an agent) are down, correspondence audits are where the increase occurred.

    The total number of partnership and S corporation audits increased substantially on a percentage basis (although the total number is relatively low). The percentage audited increased slightly from 2014 to 2015, but your chances of getting audited is still about 1/2 of 1 percent.

    But keep in mind that your chances of getting audited could be significantly higher–or lower. For example, Middletown Partners is a two-person partnership generating about $375,000 per year in revenue. Jack-Hammer LLC is a construction company with 50 employees and $7 million in revenue with $1 million in assets. Other things being equal, Jack-Hammer’s chances of an audit are much higher. The same for individuals. Fred and Wilma had income of only $126,000, but they have rental losses, and deducted property contributions to charity of $12,000. Ralph and Alice work on Wall Street and have a combined W-2s of $1.2 million. But they rent an apartment, have no kids, and no outside investments. Fred and Wilma’s audit chances are probably higher than Ralph and Alice. While the numbers are interesting and give you an idea of your overall chances of getting audited in a particular category, the IRS is more likely to pick your return because of a particular triggering item. That could be charitable contributions materially in excess of the average for returns at your income level or claiming a substantial deduction for property contributions. Property contributions beyond a certain amount require an appraisal which are frequently challenged by the IRS. Checking the box for real estate professional and fully deducting rental losses is almost sure to generate an inquiry. But don’t worry….there are a host of others.

    Keep in mind the IRS is also auditing “smarter”. They’re focusing on issues more likely to produce results for the government. And if that is not enough, the states are also getting “smarter” and using computers to analyze data. You could escape an IRS audit only to be trapped by your home state or a state in which you do business.

    Of course, none of the numbers above matter if your return is picked. Playing the audit lottery has become more dangerous. If the IRS can assess the accuracy-related penalty, it generally will. That could add 20% to your tax assessment. Interest will increase the total and, while relatively low, it can add up quickly.

    Best advice? Listen to your tax professional.

    Call Solid Tax Solutions at (845) 344-1040.

    We will help you during the entire stressful process.

    You can also learn more about us at our web site: SolidTaxSolutions.com

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

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    Categories: Tax Audit

    Donald Trump and the IRS ‘Wealth Squad’ Auditors!

    When pressed about releasing his individual tax returns during a past Republican debate,
    Donald Trump said he wouldn’t release them until the IRS finishes its audit. “You’re in the midst of negotiating and talking to the IRS,” Trump stated. “Your lawyers would never allow you to do that.”

    Is there anything legally stopping Trump from publicly releasing his tax returns? Absolutely not.

    Would any experienced tax professional representing Trump in an IRS audit advise him to publicly release his tax returns during the audit? Absolutely not.

    So Why Not Just Disclose the Returns Under Examination? The tax professionals that Trump is working with most likely have their hands full responding to numerous informal and formal detailed inquiries by the IRS “Wealth Squad” audit team assigned to his case. Neither the IRS team nor Trump’s tax team likely want the additional scrutiny brought on by a public disclosure during the examination (the IRS’ name for Audit). However, depending on the status of the current examination, it would seem highly unlikely an open IRS examination involving multiple tax years and possibly numerous entities relating to any wealthy individual would be concluded before the general election in November.

    Hands counting one hundred dollar bills
    The “Wealth Squad” Auditors- The IRS’ Big Game Hunters.

    The IRS Wealth Squad. The IRS maintains a specialized, experienced group of examiners solely focused on conducting audits of high-income/high-wealth taxpayers – the Global High Wealth Industry Group of the IRS Large Business and International division (commonly referred to as the IRS “Wealth Squad”).

    In announcing the creation of the Wealth Squad, the IRS stated “For a variety of reasons – including valid business reasons – many high wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies.” Recently, the U.S. Court of Appeals for the Eleventh Circuit noted “It is no surprise that a knowledgeable tax attorney would use numerous legal entities to accomplish different objectives. This does not make them illegitimate. Unfortunately such ‘maneuvering’ is apparently encouraged by our present tax laws and codes.”

    Although there are many sophisticated IRS representatives, few could realistically expect to individually unravel the intricacies of a well-designed business and estate plan possibly employing multiple domestic and foreign entities and investment arrangements. The Wealth Squad is designed to allow the IRS to better understand the sophisticated financial, business and investment arrangements of the taxpayer by engaging a team of specialists to take a unified, holistic look at the entire web of inter-related entities controlled by a high wealth individual to discover the entire economic picture of the enterprise and to assess the tax compliance of that overall enterprise.

    In a Wealth Squad examination, the IRS deploys a team of highly capable, experienced examination specialists which include technical advisers to provide industry or issue specialized tax expertise, flow-through entity specialists, international examiners, economists to identify economic trends within returns, valuation experts and others. The Wealth Squad routinely draws on additional examination resources from throughout the IRS organization.  The IRS recently even engaged a private law firm for assistance during a corporate examination.

    The Wealth Squad pursues a comprehensive approach to auditing high-income taxpayers by expanding the examinations beyond the individual income tax return to include examinations of related and controlled entities. A typical Wealth Squad examination consists of a key case, generally the taxpayer’s Form 1040, and returns of related entities. These entities may include partnerships, trusts, S corporations, C corporations, private foundations, etc. Due to the complexity of most high-income taxpayers’ returns, it generally takes more time and resources than a traditional individual audit. Complex, detailed examinations of wealthy taxpayers are not easily concluded; neither the taxpayer nor the IRS examination teams have any desire to unnecessarily prolong the audit process. However, experienced IRS examination teams conducting Wealth Squad audits rarely conclude an examination until they are satisfied with the proposed resolution.

    During such audits, examiners make detailed demands for information and supporting documentation that in turn generate detailed responses from the taxpayer’s representatives, which often generate additional detailed requests for information from the IRS. These examinations typically look at 2-3 years of returns for the individual and many, if not all, of the related entities. Sometimes, the audit can expand to the returns of other investors involved in the related entities as well. These examinations often take years to complete and as current tax returns are filed, the examiner often seeks to at least review reportable positions within the currently filed returns as part of the ongoing examination process.

    Determining “Where and How” to Report a Transaction. Wealthy taxpayers often engage teams of sophisticated tax, business, and estate planning lawyers, tax professionals, and other advisers to oversee their business activities and to legitimately minimize their potential tax liabilities. For a wealthy individual with complex, diversified investments, the individual tax return, by itself, will typically only reflect net items flowing through from numerous other related entities.

    Detailed IRS audits are actually anticipated by the teams of professionals typically representing wealthy individuals. In this regard, the tax advisors are often significantly involved in most every transaction from the initial consideration through to “where and how” the reportable items are set forth within the appropriate tax return for the individual and/or the related entities. Responsibility for proper reporting and disclosure is shared between the tax representatives and the individual taxpayer although, in complex returns, the individual is rarely directly involved in these discussions. Given the complexities of the Internal Revenue Code and other tax authorities, few non-tax experienced professionals would realistically be capable of discerning “where and how” to report transactions often associated with wealthy individuals and their related entities.

    What’s in Trump’s Tax Returns? Teams of sophisticated tax advisers were likely engaged throughout Trump’s career to assure the absence of any “bombshell” within the returns. His returns might actually be somewhat unremarkable but for the fact they are the returns of Donald Trump. For wealthy individuals, individual tax returns sometimes only provide a brief financial overview linked to numerous other conclusions and entities. To fully understand the financial status of Trump, one would likely need to see returns for multiple years, the work-papers for the individual returns and the returns for numerous related entities, something that is unlikely to happen.

    So, what is in Trump’s Returns? Likely information prepared by many very well-qualified tax professionals who were quite aware the general public might be looking at the returns at some future date. It’s unlikely an accurate overall financial picture will surface by simply reviewing his returns. He likely pays taxes at a lesser rate than many of us given the nature of his real estate and similar investments being subjected to lower tax rates than salaries earned by the rest of us. Certainly, his tax professionals have not advised him to overpay his taxes.

    “No-Change” Audit Results of the Super-Rich. Overall, returns for wealthy taxpayers are audited by the IRS at a significantly higher rate than taxpayers at lower income levels. For FY2014, the IRS audited 16.22% (24.16% for FY 2013) of returns for individuals having $10,000,000 or more in adjusted gross income and 10.53% (15.98% for FY 2013) for individuals having $5 million to $10 million in adjusted gross income but only audited 0.86% of all returns filed by individuals (with the vast majority of individual returns being conducted remotely via correspondence between the IRS and the taxpayer). Why does the IRS audit a significantly higher percentage of wealthy vs. less-wealthy taxpayers?  Quite simply. . .”because that’s where the money is,” not because of “politics or religion”.

    Following these intensive, time-consuming processes, the Wealth Squad closed 41% of their FY 2014 examinations accepting the returns as filed (a ‘no-change” examination). The “no-change” rate was 37% for FY 2013. The “no-change” rate for other examination groups within the IRS Large Business and International division (groups generally auditing large corporate taxpayers) varied between 20% to 33% for FY 2014 and 20% to 38% for FY 2013.

    Is Trump Worth More or Less Than He States? He is likely worth far more than us but may be worth far less than the approximately $10 billion he wants us to believe. However, alone, his tax returns are unlikely to provide an accurate picture beyond an estimate of $4.5billion.

    STAY TUNED FOLKS!

    So, what do  you think about Trump’s claim of  not being “allowed” to show his tax returns?

    Or, what do you think “The Donald” himself?

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Tax Audit