ALBUQUERQUE, N.M. — Another tax season ended last Tuesday, at least for those people who file their returns without an extension. To help lift you out of those post-tax season blues, where you just feel like it went so fast, I thought I would provide the latest IRS data on federal tax filings.
This is all based on the 2013 filing season, the one that ended last calendar year, so you’ll just have to keep checking back to get the 2014 numbers. But I suspect the figures won’t change very much.
First, the IRS processed 146 million individual tax returns, and 83 percent of those were electronically filed. New Mexico accounted for 907,000 of those returns, and we had an e-file rate almost identical to the national average.
For business entities, S corporations remain the most popular form, accounting for 44 percent of all entities. Partnerships are second at 35 percent with regular (“C”) corporations accounting for 21 percent. New Mexico’s percentages were similar, although with more of a balance between S corporations and partnerships.
There were 32,288 estate-tax returns filed nationally (124 from New Mexico) and 313,331 gift-tax returns (1,381 from New Mexico).
Of course what tends to interest people the most is the IRS audit risk. The IRS spends 41 cents for every $100 collected, but is a ripe political target for budget cuts.
IRS spends 19.8 percent of its budget on taxpayer services, 43.1 percent on enforcement of the tax laws, 34.5 percent on operational support, and 2.6 percent on capital acquisitions. Current-year and expected future budget cuts will come disproportionately from taxpayer services.
Only 1.4 million individual tax returns were “audited” last year, which is less than 1 percent, and the lowest rate in five years. I put “audited” in quotes because most audits are now done by a correspondence letter from the IRS.
Letters may be the lowest anxiety-level audit, but it is becoming increasingly difficult to be able to follow up with a discussion with a live human-type IRS person.
Letters often are issued in response to a mismatch between something reported to the IRS and what is reported on the return. There is often a good explanation for the difference. For this reason, there is a higher rate of “no change” audit settlements with correspondence audits.
IRS provides audit rates by several classifications of taxpayer type, but given space constraints I’ll just offer some figures based on reported adjusted gross income (AGI). This is the figure at the bottom of the first page of the “long form” 1040.
AGI between $25,000 and $100,000 has an audit rate of approximately .6 percent, or about 1 in 167 returns filed. The rate for AGI between $100,000 and $200,000 increases to .77 percent, or about 1 in 130 returns filed.
The audit rate for AGI between $200,000 and $500,000 is 2.06 percent, which is about 1 in 49 returns filed. AGI between $500,000 and $1 million leads to an audit rate of 3.79 percent, or about 1 in 26 returns filed. The lucky folks with AGI between $1 million and $5 million have a 9.02 percent audit rate, almost 1 in 11 returns filed.
Partnership and S corporation entities have an audit rate of about .4 percent, or 1 in 250 returns filed. Gift-tax returns are audited 1.1 percent of the time. Estate returns are audited at a higher rate, with almost 1 in 4 reporting assets between $5 million and $10 million audited, and almost 1 in 3 with assets above $10 million audited.
But what happens when you are audited? Well, it depends on a few things, including income level and the type of audit conducted.
With positive (no deductions) income sources between $200,000 and $1 million, 45 percent of correspondence audits result in no change if there is no business income and 28 percent no change if there is business income. Field exams have a lower no-change rate, 16 percent for non-business and 12 percent for business returns.
Lower IRS budgets will keep the audit rate low, good news for many, but may also make life more difficult for those selected for audit because it will be harder to make telephone contact to discuss IRS letters or schedule meetings to discuss your situation with a live agent.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.