IRS Audits On the Rise for Wealthy, Small Corporations and Non-Profits

The risks for IRS audits have been increasing steadily across all income levels, although the wealthiest Americans face the greatest risk increase for an income tax audit according to data released by the IRS.  Another interesting trend seen in the data is that non-profits and small corporations are being audited more and more frequently over the last 10 years.

Some people believe politics plays a role in the reason wealthier taxpayers are audited more frequently. Others believe that the wealthy are being targeted more simply because if a wealthy individual is audited and made mistakes on their tax return, the IRS stands to gain more per man hour worked.  The fact that wealthy individuals typically use more deductions and tend to file more Schedule C’s can also be reasons the wealthy get audited more.

Increasing IRS Individual Audits Based on Income Level

IRS Audits for all tax taxpayers in all income levels has been steadily increasing. However, as you can see below the rich are getting hit the hardest.

• From 2006 to 2011, taxpayers making under $200k had their audits chances increase by .9%.  In other words, the coverage rate (which is total audits divided by total returns filed in prior calendar year) went from .93% in 2006 to 1.02% in 2011.
• From 2006 to 2011, taxpayers making $200k or more had their chances of getting audited rise by 1.36%. The coverage rate for this group of taxpayers went from 2.57% to 3.93% from 2006 to 2011.
• The biggest probability increase for tax audits, impacts taxpayers making $1 million or more. In 2006, millionaires saw 5.25% of their tax returns audited, while in 2011 12.48% were audited. Therefore, the likeliness of a millionaire getting audited more than doubled (about 138% increase).

IRS Audits On Tax-Exempt Organizations & Small Corporations Up

Another interesting aspect of the data the IRS released dealt with audit statistics by business entity type.  In looking at the IRS data from 2001-2011 (10 years), it is evident that tax-exempt organizations and small corporations (corporations with assets under $10 million) are being audited more frequently. The graph below clearly shows an upward trend in audits for tax-exempt organizations and small corporations (note: large corporations were omitted in order to provide a more detailed view of the trends among all other business entity types).