INTRODUCTION

Today's discussion will focus on some of the more interesting or important tax developments that have transpired over the last year or so. The new developments addressed in this presentation will include numerous tax court cases, decisions of various federal circuit courts, as well as IRS pronouncements, revenue rulings and regulatory changes.

PART ONE: IRS AUDIT STATISTICS

I. Audit Statistics; What Are Your Chances of Being Audited?

The 2022 Internal Revenue Service Data Book contains audit statistics for years 2012 through 2020, as of the fiscal year ended September 30, 2022 (FY 2022). For tax years 2018 and earlier, the statute of limitations for audits had generally expired as of September 30, 2022. However, for 2019 and 2020 returns, the statute of limitations has yet to expire, so additional returns of those years may be audited.

For 2012 through 2018, audit rates dropped significantly. For example, individual tax returns had an audit rate of 0.8% for 2012 returns versus 0.3% for 2018. In addition, for individuals with income between $1 million and $5 million, the audit rate dropped from 4.9% for 2012 returns to 1.2% for 2018 returns.

The overall audit rate for C corporations dropped from 1.3% for 2012 returns to 0.5% for 2018 returns. For partnerships and S corporations, the audit rate for 2012 returns was 0.3% and 0.4%, respectively, compared to 0.1% and 0.1% for 2018 returns.

In FY 2022, 21.4% of audits were field audits. The others were correspondence audits.

Below are the FY 2022 audit statistics for 2020 tax returns:

A. Audit Rates for Individual Tax Returns. During FY 2022, only 0.2% of individual income tax returns filed for 2020 were audited (down from about 0.3% for 2019 returns).

Total 2020 Individual Returns Audited in FY 2022: 0.2%

(1) No positive income 0.2%
(2) $100,000 to $200,000 0.1%
(3) $500,000 to $1 million 0.4%
(4) $1 million to $5 million 0.4%
(5) $5 million to $10 million 0.7%
(6) $10 million or more 2.4%

B. Audit Rates For Partnerships and S Corporations: For partnership and S corporations, the FY 2022 audit rate for 2020 returns was less than 0.5% (down from 1% for 2019 returns).

C. Audit Rates for C Corporations. C corporation returns filed for 2020 had an audit rate of 0.5% during FY 2022 (down from 2.9% for 2019 returns).

Total 2020 C Corporation Returns Audited in Fiscal Year 2022: 0.5%

(1) Assets $1 million to $5 million 4.0%
(2) Assets $5 million to $20 million 11.5%
(3) Assets $20 million or more 17.7%

D. Schedule C Returns. Not surprisingly, the audit rates for Schedule C returns are much higher than for other individual returns. Schedule Cs filed for 2018 with receipts of $100,000-$200,000 had a 2.4% audit rate. Schedule C returns filed for 2018 with income over $200,000 had a 1.9% audit rate. The IRS has not published similar Schedule C audit statistics for 2019 or 2020 tax returns.

II. Offers in Compromise and Criminal Case Referrals.

A. Offers in Compromise. For FY 2022, the IRS received around 36,000 offers in compromise but accepted only about 13,000.

B. Criminal Case Referrals. The IRS initiated 2,558 criminal investigations for FY 2022. The IRS referred 1,837 cases for criminal prosecutions (557 for legal source tax crimes, 785 for illegal source financial crimes, and 495 for narcotics–related financial crimes) and obtained 1,564 convictions. For convictions, 1,151 were incarcerated.

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Originally published December 06, 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.