Volume 2 Issue 2008

The Internal Revenue Service is tightening enforcement. The IRS audits brought in a record amount of revenue, $23.5 billion in fiscal 2007, up from $17.2 billion the year before.  This suggests that IRS' efforts to update its return selection formulas are paying off, and agents aren't doing as many no-change audits.

In fiscal 2007, the IRS audited 1.03% of all personal income returns, or one out of every 97 returns, up a tad from the 0.98% exam rate in 2006.  Still, the last time the rate topped 1% was in 1997, when it was 1.28%.

Taxpayers making $1 million or more saw the highest increase in audits, 9.25% in 2007, up from 6.3% the previous year.  For taxpayers with incomes over $100,000 but less than $1 million, the examination rate was 1.77%, up from 1.67% in 2006.  And the audit rate for taxpayers with incomes below $100,000 was 0.93%, a small increase from 0.89% the previous year.

Small businesses felt a little more audit pressure in 2007, as well.   S Corps exams increased to 0.45% in 2007, up from 0.38% the previous year.  For partnerships, 0.42% of returns were audited, compared with 0.36% in 2006.  The audit rate for small corporations increased to 0.92% from 0.80%. For more information on significant changes in the way the IRS targets businesses for tax audits, and how it conducts them click here.

Proper recordkeeping is your best defense in the event your return is selected for audit:

• Recordkeeping requirements for Individuals

• Recordkeeping requirements for Business (including recent guidance on electronic storage of records)

• Recordkeeping requirements for Travel and Entertainment expenses (a frequent source of audit conflict between the IRS and small businesses)