Chapter 18
The Tax Compliance
Process
The Audit Process
• Corporate returns selected mainly by size.
• Individual returns are scored by IRS using
discriminant function system.
• Returns audited more frequently:
• high income
• high deduction
• personal business (Schedule C)
Statute of Limitations
• The IRS has three years from the later of
• statutory due date (4/15) or
• date actually filed
• If the taxpayer omits > 25% of gross income, IRS
has six (6) years.
• Fraudulent returns are open indefinitely.
IRS Budget cuts have reduced audit
risk
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
342,762
391,621
359,750
344,152
291,643
267,498
1,238,632
1,173,069
1,122,216
1,060,779
950,836
961,261
1,581,394
1,564,690
1,481,966
1,404,931
1,242,479
1,228,759
Revenue agents
13,888
13,867
13,021
12,234
11,629
10,840
Exam revenues
$16.9 B
$12.4 B
$10.2 B
$9.83 B
$12.51 B
$7.32 B
Tax returns filed
142,823,105
140,837,499
143,399,737
145,819,388
145,236,429
146,861,217
1.11%
1.11%
1.03%
0.96%
0.86%
0.84%
$12.15 B
$12.12 B
$11.82 B
$11.20 B
$11.29 B
$10.9 B
Field audits
Correspondence
audits
Total individual audits
Audit coverage
IRS budget
Types of Audits
• Correspondence - routine audits conducted by mail - send
in documentation, explanations, etc.
• Office exams take place at an IRS district office - limited
scope.
• Field exams take place at the taxpayer’s place of business these are broader in scope.
• Deficiency is the additional tax owed. If interest is
charged, it is deductible if the taxpayer is a corporation,
but only for individuals if the liability is related to the
operation of the individual’s business.