IRS Info

Jul. 7th, 2008 11:42 am
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From our company email newsletter:

In recently-released data, the IRS released the audit statistics for return audit for the IRS fiscal year 2007. It provides information about how many returns are being audited and where the IRS is focusing their enforcement activities.

During fiscal year 2007, the IRS collected almost $2.4 trillion in taxes (net of refunds) and processed more than 235 million returns. More than 114 million individual income tax return filers received tax refunds that totaled $248.6 billion. In fiscal year 2007, IRS spent an average of 40 cents to collect each $100 of tax revenue, which was the lowest in seven years and down from 42 cents per $100 in fiscal year 2006.

So what are your chances of being audited? A total of 1,384,563 individual income tax returns were audited out of a total of 134.5 million individual returns that were filed in the previous year. This is about 1.0% of all individual returns filed, up slightly from the previous year. Only 22.49% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.5%) were correspondence audits. These percentages are about the same as they were in the prior year. The IRS is pretty good at selecting which returns to audit, since approximately 85% of the audits result in the taxpayer owing additional taxes.

What issues are the audits focusing on? Here is a roundup of selected audit rates:

o Earned Income Credit (EIC) - Of the total number of returns audited, 503,267 (36.5%) were selected on the basis of an earned income tax credit (EITC) claim.

o Schedule F (Individual Farm Returns) - About 1.5 million individual returns included farm returns. Of this group, only 5,705 (0.4%) were audited.

Individual returns can include additional business related schedules that can increase the odds of audit. Among those are Schedule C (non-farm sole proprietorship), Schedule E (supplemental income and loss from rentals, partnerships and S-corporations), or Form 2106 (employee business expenses). The following statistics apply to non-EIC returns including these schedules:

o Individual Returns without a Schedule C, E, F, 2106 – 4%
o Individual Returns with a Schedule E or 2106 – 1.2%
o Individual Returns with a Schedule C – These are categorized by size of gross receipts reported on the return.

- Under $25,000 – 1.3%
- $25,000 to $100,000 – 2%
- $100,000 to $200,000 – 6.2%
- $200,000 or more – 1,9%

The IRS also focuses their audit levels on higher-income returns as evidenced by the following statistics based on total positive income (TPI):

o Non-business Returns with a TPI of at least $200,000 and under $1 million – 2%
o Business returns with a TPI of at least $200,000 and under $1 million – 2.9%
o All returns with TPI of $1 million or more – 9.3%

For returns other than individual returns, the audit rates by type were:

o Estate and trust income tax returns - 0.1%
o Corporations with less than $10 million of assets - 0.9%
o Corporations with $10 million or more of assets - 16.8%
o S corporations - 0.5%
o Partnerships - 0.4%
o Estate tax returns - 7.7%
o Gift tax returns - 0.6%

In fiscal year 2007, IRS assessed 27.3 million civil penalties against individual taxpayers of which 55% were for failure to pay and 28.2% for underpayment of estimated tax. There were also 327,822 assessments for accuracy and negligence penalties.

The IRS is also becoming less likely to settle tax disputes with taxpayers who, for hardship reasons, offer to pay less than the amount due in order to settle up with the IRS. In 2007, 46,000 offers in compromise were received by IRS, and only 12,000 (26%) were accepted.

On the corporation side, there were a total of 762,718 civil penalty assessments (up from 701,785 for FY 2006), 82.9% for either failure to pay or underpayment of estimated tax.

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 those of us who understand the audit process and can address potential issues that arise. So, if you receive an audit notice, the next call you make should be to this office.
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Congress Approves Budget Resolution

Congress this week approved a blueprint (please note, file size 11MB) for the federal budget over the next five fiscal years. The budget resolution—which does not require the president's signature, and does not have the force of law—estimates levels of spending and revenue, based on certain policy assumptions. Written by congressional Democrats, the resolution hints at how the Democrats will attempt to deal with the 2001 and 2003 tax cuts when they expire at the end of 2010. It assumes an extension of the marriage penalty relief, child tax credit, and 10 percent income tax bracket. It also assumes the AMT patch is extended and the estate tax is reformed to affect a small number of taxpayers.
The one binding feature of the budget resolution is its discretionary spending caps. The resolution allows for funding of IRS at President Bush's requested level ($11.36 billion), with the potential for an extra $490 million for enforcement if Congress provides at least $7 billion for IRS enforcement activities.
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2007 Tax Season Sets Records for E-file, Direct Deposit,

WASHINGTON — The recently completed 2007 tax filing season set a number of electronic records, highlighted by over 76 million electronically-filed individual tax returns and more than 140 million visits to, the Internal Revenue Service said today.

“E-file and our other electronic services helped us deliver a strong filing season for the nation’s taxpayers,” said IRS Acting Commissioner Kevin M. Brown. “Again this year, millions of additional taxpayers gave up paper tax returns to file electronically. E-file and were among several factors that helped us overcome one of the most challenging filing seasons ever for the IRS.”

This year’s tax season saw a surge in electronic filing among last-minute filers, a group that has traditionally sent in paper returns. During the week that included this year’s tax-filing deadline (April 14 to 20) alone, the number of electronically-filed returns received by the IRS jumped 35 percent over the same week last year, even though the overall number of returns (paper and electronic) received during the same week only rose 12 percent.

New records were also set for the number of returns e-filed by home computer users, the number of balance-due returns filed electronically and the number and amount of direct-deposit refunds. Among the highlights of new statistics released today:

The over 76.7 million e-filed returns accepted through May 4 topped the more than 73.2 million electronically-filed returns received for all of 2006. It’s also an 8.9 percent increase over last year at this time, with most of the increase coming in March and April. Based on current trends, the agency expects about 58 percent of all returns to be e-filed this year. Taxpayers who filed for extensions can use e-file until Oct. 15.
A record 22 million taxpayers e-filed from a home computer, up 11 percent over the same time last year and eclipsing 2006’s year-long total of 20.3 million.
This filing season visits to, the agency’s popular Web site, climbed almost 10 percent to more than 140 million.
The average refund this year is $2,255, a 2.5 percent increase over last year at this time. More than 59 million refunds, a new record, were deposited directly into savings, checking and brokerage accounts, representing more than 61 percent of all refunds issued. Those who choose direct deposit get their refunds at least a week sooner. Available year-round, direct deposit eliminates the chance of a lost, stolen or undeliverable refund. Taxpayers claiming refunds who have not yet filed may want to consider using direct deposit to get a head start on their 2007 IRA contribution.
Nearly $158 billion have been directly deposited so far this year, an 11 percent jump over last year at this time. This surpasses the 2006 year-end total of $149.2 billion.
The number of balance-due returns filed electronically surged 14.2 percent to a record 9.4 million. For all of last year, almost 8.9 million balance-due returns were filed electronically.


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