The Services audited 1.11% of personal income tax returns in 2010, the highest audit rate since 1997 when 1.28% of returns were examined. Taxpayers with income over $1 million or more saw the largest jump in audits, 8.36% in 2010 (1 in 12 returns!), up from 6.42% in the previous year. In the $200K to $1 million income range the audit rate was 2.65%, up from 2.55% in 2009. For filers with income below $200K the rate was 1.04% in 2010, just a bit above the 2009 rate of .96%.
Keep in mind that the majority of audits are what we call “correspondence audits” done via mail, generally on a single issue. These are far less intrusive then “in person” audits done by agents.
The overall rate of business return audits (corporations and partnerships) held steady at .58% in 2010. Audits of partnerships slipped a bit to .36%, compared with .38% in 2009. The examination rate for small corporations increased to .94%, up from .85%, S corporations audit rate was just .37%, down from .40% in 2009.
Issues to keep in mind – in all audits we are seeing the Internal Revenue Service is expecting the taxpayer to have both the original receipt AND the proof of payment as to how that expenditure was paid (cancelled check, credit card statement, etc.). Of course the overarching issue is always the purpose of the expense and why it is deductible in the first place.
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