One of the themes I have long been covering has been the use of corporate structures by small businesses.  While the reasons have mainly been for the additional tax saving opportunities and personal protection from many business liabilities and lawsuits, another benefit that I have only occasionally mentioned is the lower profile a small corporation has for an IRS audit than there is when reporting all business income on 1040s. 

Reading this statement from the current IRS Commissioner on his performance in office, that point is very clear.  Specifically, the following statistics he mentioned for the fiscal year ended September 30th:

Total individual returns audited increased by over 20% to 1,216,000 from 1,008,000 in 2004.

Audits of individuals with incomes over $100,000 surpassed 221,000, the highest figure in 10 years, and well over double the 92,000 completed in fiscal year 2001.  The coverage rate in this category is still too low, but at 1.58% is double what it was four years ago.

Audits of small businesses organized as corporations turned up after years of decline.  17,867 were completed in 2005 against 7,294 a year earlier.

Audits of larger corporations – those with assets over $10 million – also increased, up 14% from a year ago to 10,878.  The coverage rate of 20% has rebounded significantly from that of 12% just two years ago.

The gist of this is that the IRS cross-hairs are definitely focused on 1040s with income over $100,000.  While that is a large enough figure to attract attention among all of the 1040s filed each year, that kind of income is a tiny drop in the bucket in the world of corporations, where IRS focus is on those with millions and billions of dollars in income.   

I wanted to check the percentage of corporate tax returns audited, but IRS statistics only go up to 2002.  I downloaded the 2002 corp Excel spreadsheet and it shows the total number of corporate income tax returns with assets under $10 million as 5,186,852.  Using the most recent number of audits of 17,867 gives an audit percentage of just 0.34%.  With the number of corporations most likely higher in recent years, that percentage would be even smaller.  Using the 1.58% audit coverage of 1040s with more than $100,000 of income, that works out to more than four and a half times more likely to be audited.   

Tax Analysts looks at the Commissioner’s report.

One other statistic from the Commissioner is a little hard to believe:

 Our toll-free tax law accuracy hit a high of 89%.

I suspect that, much like the political opinion polls being bandied about by the media, these stats were intentionally skewed. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/04/2005 04:28:00 PM Send this post: