Vernoia, Enterline + Brewer, CPA LLC

The IRS budget has suffered significant funding cuts to the past few fiscal year (FY) budgets. Most recently, IRS Commissioner John Koskinen told reporters that the IRS has been forced to absorb a $346 million cut to its FY 2015 budget. Such drastic reductions directly impact the IRS’s ability to enforce the nation’s tax laws. This became evident after the IRS issued its annual Data Book for FY 2014. (The Data Book provides statistical information on examinations, collections, taxpayer assistance, and other activities.) This year, the Data Book indicated that IRS audit rates have fallen for individuals and large corporate taxpayers between FY 2013 and FY 2014. On the other hand, the audit rate for partnerships increased slightly, ostensibly as a result of the IRS’s recent policy favoring more audits of this long-neglected sector.

Exam coverage: individuals

Individual returns filed in 2013, including both business and nonbusiness taxpayers, were audited at just under an overall 0.9 percent rate during FY 2014, based on more than 145.2 million individual returns filed. The audit rate for individuals in all income categories declined from FY 2013 to FY 2014. The drop was highest for taxpayers with income between $1 and $5 million. The audit rate for this category of taxpayers dropped by nearly three percentage points.

Individual business tax returns with and without the earned income credit (other than farm returns), were audited at a 1.59-percent rate, based on 679,093 audited returns out of nearly 42.7 million filed. This represents a decline from the 1.78 rate from FY 2013, based on 759,179 audited returns out of nearly 42.7 million filed.

Exam coverage: corporations

The IRS examined nearly 1.35 percent of all corporate returns (other than S corps) during FY 2014, based on a total of nearly 1.92 million returns and 25,905 examinations. The IRS reported that during FY 2014 it recommended more than $17.1 billion in additions to tax for corporate returns. The additions to tax recommended for returns filed by corporate taxpayers with more than $20 billion in assets comprised approximately 50.6 percent of the total additions to tax. Large corporations with total assets between $5 billion and $20 billion experienced an audit rate of only 44 percent, representing a dramatic decrease from FY 2012 when the audit rate for this same category of taxpayer was nearly 61 percent.

Exam coverage: partnerships

Partnerships and S corps filed a total of approximately 8.4 million returns during FY 2014, a slight increase from FY 2013 when these types of entities filed 8.3 million returns. In addition, the audit rate increased slightly from 0.42 percent in FY 2013 to 0.43 percent for FY 2014. By contrast, the audit rate for all types of businesses fell slightly from 0.61 percent in FY 2013 to 0.57 percent in FY 2014. This trend is likely to continue as IRS officials have recently announced that the agency intends to concentrate more heavily on partnership audits in the future.

Commissioner Koskinen noted in the 2014 Data Book that during FY 2014, the IRS had audited tax returns of about 1.2 million individuals, nearly 12 percent less than the previous year. The figure was, in fact, the lowest it has been since FY 2005. Despite this, the IRS admitted that it had managed to hold steady the number of tax returns processed (approximately 240 million) and amount of revenue collected (approximately $3.1 trillion). However, the IRS estimated that as a result of the enforcement cuts, the federal government likely will lose an estimated $2 billion in revenue that otherwise would have been collected.

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