IRS reveals stepped up audits of high-income individuals and pass-through entities

In 2007, the IRS increased audits of all individuals across all income levels from 2006. Increased enforcement efforts really hit hard with high-income individuals especially: one out of 11 millionaires faced an audit in 2007. The IRS audited 84 percent more individual returns of taxpayers with incomes of at least $1 million than during 2006. All totaled, the IRS audited more than 1.3 million individual returns in 2007, the most since 1998. The IRS also ramped up audits of pass-through entities such as partnerships and S corporations. At the same time, however, audits of large corporations fell from the prior year.

Millionaires
Audits of individuals with incomes of at least $1 million increased 84 percent from 2006 to 2007. In 2007, more than 30,000 of these millionaires were audited, compared to 17,000 in 2006. More than one-half of these audits were correspondence audits.

Other high-income individuals
The IRS considers high-income individuals to be those who file a Form 1040 with Total Positive Income (TPI) of $100,000 or more. In general, TPI is calculated by using only positive income values from specific income fields on the tax return and treats losses as zero. Not only did the IRS increase audits of millionaires in 2007, the agency also increased audits of high-income individuals with incomes above $200,000 in 2007 as compared to 2006. Audits of individuals with incomes over $200,000 reached 113,105 returns in 2007, reflecting an increase of almost 30 percent from the previous year.

Audits of individuals with incomes of $100,000 or more also increased. The IRS audited 293,188 of these returns in 2007, up almost 14 percent from 2006.

All audits
In 2007, audits of all individuals across all income levels increased. According to the IRS, the total number of individual returns audited in 2007 was 1.38 million, compared to 1.29 million in 2006. This is an increase of seven percent.

One million of the 1.38 million individual returns selected for audit in 2007 were correspondence audits, as opposed to face-to-face audits.

Businesses
In 2007, the IRS paid special attention to two popular pass-through business entities: S corporations and partnerships. Audits of S corps (taxpayers filing Form 1120-S) and partnerships (taxpayers filing Form 1065) increased by approximately 25 percent in 2007 from 2006. While audits of S corps and partnerships rose in 2007, the number of large corporate returns examined by the IRS fell. In 2007, the IRS examined 9,644 corporate returns, down from 10,591 in 2006. Audits of businesses in general rose to 59,516 in 2007 from 52,223 in 2006 (an increase of almost 14 percent).

Enforcement revenue
The IRS is under tremendous pressure from Congress to close the $300 billion tax gap, the difference between what taxpayers owe and what they actually pay. The IRS reported that enforcement and examination revenue totaled more than $55 billion in 2007, up from $48.7 billion in 2006, and nearly $34.1 billion in 2002.

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