While only .8% of returns get audited, it’s a common fear. How you structure your business can be a big factor in the process.
For example, the most prevalent form of legal entity for a small business today is the Limited Liability Company (LLC). In doing your taxes, you will be filing a Schedule C Sole proprietor tax return, assuming the LLC is owned by a single individual. This is the most common type of return that gets audited. To reduce your exposure, consider operating as a corporation. In this way, you receive a W-2 at the end of the year, and the business files its’ own tax returns.
The IRS has gotten pretty good at selecting which returns to audit, since around 85% of the audits result in the taxpayer owing additional taxes.
So what are the other points that the audit focuses on? Below are some selected audit rates:
- Earned Income Tax Credit (EITC) – EITC is known to be an area of high taxpayer fraud so these returns are often subject of high audit rates. Out of all the returns audited, 538,562 (34.6%) were chosen on the basis of a claim of earned income tax credit.
The following figures apply to non-EITC returns which includes these schedules:
- Individual Returns without a Schedule C, E, F, 2106 –0.4%
- Individual Returns with a Schedule E or 2106 – 1.0%
- Individual Returns with a Schedule C – Which are organzied by size of gross receipts reported on the return:
Under $25,000 – 1.0%
$25,000 to $100,000 – 2.3%
$100,000 to $200,000 – 3.0%
$200,000 or more – 2.7%
The IRS also has a tendency to choose their audits based on higher-income returns, as shown by the following figures based on total positive income (TPI):
- Non-business returns with a TPI of at least $200,000 and under $1 million – 2.5%\
- Business returns with a TPI of at least $200,000 and under $1 million – 3.2%
- All returns with a TPI of $1 million or more – 10.8%
For returns other than individual returns, the audit rates by type were as follows:
- Estate and trust income tax returns – 0.1%
- Corporations with less than $10 million of assets – 1.0%
- Corporations with $10 million or more of assets – 15.8%
- S corporations – 0.4%
- Partnerships – 0.4%
- Estate tax returns – 11.6%
- Gift tax returns – 1.1%
Due to the IRS’s high success rate for audit programs, it’s not advised for a taxpayer to represent themselves during an audit. This is better left to those with a firm understanding of the audit process and are able to address any potential issues that may arise. So, if you find yourself facing an audit, contact our offices in Joplin, MO and our team of Certified Public Accountants will work with you to make sure you have what you need.