November 19, 2018

IRS Examination Coverage

The Internal Revenue Service has listed the percentage of tax returns filed and examined by the amount of Adjusted Gross Income, see below. The returns showing Adjusted Gross Income, AGI, for 2016 of $10,000,000 or more were the highest audit at 14.52%. The returns with AGI of $75,000 to under $100,000 were the lowest audited returns for tax year 2016.

The IRS can audit your tax returns for returns filed up to 3 years from the date of the returns being filed. So, if you filed your 2016 tax return with an extension from April 15, 2017 to October 15, 2017, then the IRS has 3 years from October 15, 2017 to examine your 2016 tax return. This means the IRS can send you an audit notification letter up to October 15, 2020. So, be sure to keep all of your receipts, checks, bank statements, invoices, tax documents and whatever other documents that you believe are and/or were relevant in preparing your 2016 tax return.

If the IRS is asserting a civil fraud or criminal fraud, then the period of time the IRS can go back is 6 years for civil fraud and no limit for criminal fraud examinations. A simple examination can turn quickly, within seconds, from a normal examination to a criminal examination; all during the examination.

It is wise, I believe, to consider all office or field audits very seriously and hire competent legal tax counsel at the very onset of receiving an examination notice. You will notice the examination notice for a hearing or response is usually less than 20 days and you DO NOT want to miss this examination date!

Just us a call so we can best advise you of how to proceed with your initial letter

Michael B. Nelson, Esq.

Offshore Compliance

Table 9b. Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income,
Fiscal Year 2017
Size of adjusted gross income [1] Returns filed in Calendar
Year 2016
(percentage of total) [2]
Examination coverage
in Fiscal Year 2017
(percentage) [3]
All returns [4] 100.00                   0.62                  
No adjusted gross income [5] 1.69 2.55
$1 under $25,000 36.47 0.71
$25,000 under $50,000 23.33 0.49
$50,000 under $75,000 13.26 0.48
$75,000 under $100,000 8.59 0.45
$100,000 under $200,000 12.19 0.47
$200,000 under $500,000 3.60 0.70
$500,000 under $1,000,000 0.58 1.56
$1,000,000 under $5,000,000 0.26 3.52
$5,000,000 under $10,000,000 0.02 7.95
$10,000,000 or more 0.01 14.52
[1] Adjusted gross income is total income (including losses), as defined by the Internal Revenue Code, less statutory adjustments—primarily business, investment, and certain other deductions.
[2] Calendar Year (CY) 2016 data are presented because, in general, examination activity is associated with returns filed in the previous calendar year. The total number of individual income tax returns filed in CY 2016 was 149,919,416. See table 9a for additional details.
[3]   Represents returns examined in Fiscal Year 2017 for each adjusted gross income (AGI) class, as a percentage of the total number of returns filed in Calendar Year 2016 for that AGI class.
[4] In addition to examinations of returns filed, the IRS examined more than 62,800 cases in which no return was filed. These nonfiler cases were referred for examination by the Collections Program and the Automated Substitute for Return (ASFR) Program. Under the ASFR Program, the IRS uses information returns from third parties (such as Forms W–2 and 1099) to identify tax return delinquencies, constructs tax returns for certain nonfilers based on that third-party information, and assesses tax, interest, and penalties based on the substitute returns. These nonfiler cases are excluded from the examination data in this table. See Table 14 for information on the ASFR Program.
[5] Includes returns with adjusted gross income of less than zero. AGI may be less than zero when a taxpayer reports losses or statutory adjustments that exceed total income.
NOTE: This table shows examination coverage of individual income tax returns classified by size of adjusted gross income, while Tables 9a and 10–12 report examination coverage by size of total positive income. Total positive income is the sum of all positive amounts shown for the various sources of income reported on the individual income tax return and therefore excludes losses. By comparison, adjusted gross income includes losses, such as farm losses.
SOURCE: Research, Applied Analytics, and Statistics.