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IRS enforcement continues downward trajectory

Each year, the IRS releases a data book with statistics from the prior calendar year. Culling through the tables yields interesting information.

Total collections have increased from almost $92 billion in 1960 to $3.3 trillion in 2016. The Service also processed 244 million tax returns and issued approximately $426 million in taxpayer refunds last year.

On the state side, total Massachusetts collections totaled almost $109 billion in 2016. Massachusetts business filings give a snapshot that seems to indicate a preference for S Corps (93,735 returns) and partnerships (77,408) in business formation. C Corporations are often reserved for larger scale operations and likely explain the lower number (54,133 returns).

Enforcement: The number of audits

Amid continued budget cuts, the number of IRS audits has continued to slowly decline. The Service did audit 1.2 million (.6 percent) of all the returns filed in 2015.

Business returns receive a bit more scrutiny with about a one percent audit rate compared to .7 percent for individual tax returns. Partnership and S Corp structures received proportionately fewer audits (.3 percent and .4 percent, respectively). Audit exposure increases in each category as income increases. More than 70 percent were correspondence audits completed via letters in the mail.

Taxpayers who disagreed with the IRS examination totaled about 29,000 and a contested $12.2 billion in tax.

The IRS gathers independent information, for example W-2 and 1099 data filed by employers. The Automated Underreporter Program matches up the information and flags discrepancies for closer review. This system found math errors related to tax calculation, exemption number/amount and standard versus itemized deductions. It closed 3.5 million cases through the program which resulted in an additional $6.8 billion in assessments.

The overall odds of an audit remain low by historic standards, but focus and resources continue to be directed at high net worth individual taxpayers and the largest corporations.

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