Odds of Being Audited - Individuals

For anyone who has not looked through the IRS Data Book, I highly recommend it. It is packed with a ton of information.





As you can see, for 2014 of all the returns filed (192,000,000) only 0.7% were actually audited. However, actual audit chances are based on where your income is for the year. This table is from the IRS Data Book. The first column represents a persons adjusted gross income. The second column is how many returns were filed in that group divided by total returns filed. The last column shows how many returns were audited in that group.


So, if you had $10,000,000 or more of adjusted gross income, the IRS audited 34.69 percent of your group. The $50,000 to $70,000 group had the lowest chance of being selected at just 0.47 percent.


It is interesting to see such a high coverage on people who had no adjusted gross income.

All returns [4]	100.00	0.84
No adjusted gross income [5]	1.76	3.78
$1 under $25,000	38.51	1.01
$25,000 under $50,000	23.23	0.50
$50,000 under $75,000	13.13	0.47
$75,000 under $100,000	8.42	0.49
$100,000 under $200,000	11.15	0.64
$200,000 under $500,000	3.08	1.54
$500,000 under $1,000,000	0.48	3.81
$1,000,000 under $5,000,000	0.21	8.42
$5,000,000 under $10,000,000	0.01	19.44
$10,000,000 or more	0.01	34.69

Do You Have a TEFRA Partnership

TEFRA (named after the Tax Equity and Fiscal Responsibility Act) deals with larger partnerships. If you have a partnership that is a TEFRA partnership, you need to appoint a Tax Matters Partner and the partnership will fall under the "strange" TEFRA audit rules
** Note - If you do not have a TEFRA partnership, you do not appoint a Tax Matters Partner.
The Internal Revenue Code calls a non-TEFRA partnership, a small partnership. This means the partnership has less than 11 partners. If at any time during the year, the partnership has more than 10 partners, then the partnership is a TEFRA partnership.
If the partnership has 10 or fewer partners, it can still be a TEFRA partnership if any of the following are partners:

• Partnership;
• Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes;
• Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor);
• Nominee;
• Nonresident alien individual; or
• S corporation.

If the partnership has 10 or fewer partners, and does not have any of the above as a partner, it is a small partnership unless it filed Form 8893 to elect to be treated as a TEFRA partnership. This form, if filed, should become part of your client's permanent file.

We will go into the more complicated TEFRA audit rules later. Keep in mind, TEFRA is going away in two years, but the determination of if a partnership is a small partnership will still matter for the new partnership audit rules.

Relevant Citations:

Partnership Audit Technique Guide

Form 8893

IRS FOIA Request Locations

I have been getting questions the last couple of days on where to send a Freedom of Information Act (FOIA) Request to the IRS. The IRS has two addresses to send the request to depending on the type of documents you need.


If you need information from IRS Headquarters, that is not in the electronic reading room yet, then send the request to:
Fax: 877-807-9215
Mail: IRS FOIA Request
HQ FOIA
Stop 211
PO Box 621506
Atlanta, GA 30362-3006


If you want your own records or your client's records, send the request to:
Fax: 877-891-6035
Mail: IRS FOIA Request
Stop 93A
Post Office Box 621506
Atlanta GA 30362-3006


That IRS has put together a great source for FOIA requests here.

Statute of Limitations - Trust Fund Recovery Penalties

One of the most common mistakes that I see practitioners and the IRS make is incorrect assessments of Trust Fund Recovery Penalties (TFRP). This is partially due to an old IRS idea that TFRP did not have a statute of limitations. However, that idea was quickly shot down when it was taken to court. IRM Section 5.19.14.1.5 is a great place to look when you have TFRP issues.
As practitioners, one of the first steps in exercising due diligence for our clients is to check all applicable statutes of limitations to see if any apply to your client.
This chart is a great breakdown of when a TFRP must be assessed. Any assessment outside of this range would be an incorrect assessment:

Withholding or Federal Insurance Contribution Act (FICA),	Three years from the succeeding April 15th or three years from the date return was filed; whichever is later.
Excise or Railroad Retirement Tax Act (RRTA),	Three years from the due date of return, without regard to any extension; or three years from the date return was filed; whichever is later.
Withholding, FICA, Excise or RRTA returns that are: filed under IRC 6020(b)(1), Returns Executed by Secretary false or fraudulent willful attempt to evade tax; or not filed	No limitation period.

IRS Third Party Notices

IRS released Chief Counsel Advice 201621012 today, which discussed third party contacts. While the actual situation is not all that interesting, it is good to note the laws discussed in the advice.
Under IRC 7602(c), the IRS is required to provide reasonable notice that they will contact third parties when auditing or attempting to collect taxes from a taxpayer. This is usually done during the initial meeting with the taxpayer.
Practitioners need to remember IRC 7602(c)(2), which states the IRS is required to periodically provide a list of the third party contacts. The practitioner can also request the list at any time. While most of the IRS does a good job of keeping practitioners informed and following the Internal Revenue Manuel, in longer audits or situations where third party contact has occurred, it is usually good practice to keep an eye on the list of third party contacts.
The only third party contacts that do not need to be disclosed are: when the taxpayer authorized the contact, if notice would jeopardize collection of tax or threat of a reprisal against any person, and in criminal investigations.


Relevant Cites:
IRC 7602

Settlement Agreements - Mitigation

If you have a barred refund due to a Statute of Limitations rule, your client can still have a chance to get a refund under mitigation rules. In order to get the refund, the client must meet all four criteria in IRC 1312:
1. There was an error in a closed tax year
2. There is a determination in a non-closed tax year
3. The determination is due to a circumstance described in 1312.
4. There must be an inconsistent position
The IRS released Chief Counsel Advice 201622032. In the advice, the IRS looks at whether a stipulated decision in Tax Court is a determination for the purposes of the mitigation rules.
Under 1312(7)(a), "The determination determines the basis of property, and in respect of any transaction on which such basis depends, or in respect of any transaction which was erroneously treated as affecting such basis, there occurred, with respect to a taxpayer described in subparagraph (B) of this paragraph, any of the errors described in subparagraph (C) of this paragraph."
The IRS theory was that the settlement negotiations determined the basis of the asset, not the actual facts of what the basis should be. So, while the settlement appears to be a determination in form, it is was substantively not a determination.
Sometime next week, we will go into a more detailed discussion on mitigation.


Relevant Cites:
Forbes Article on Topic
IRC 1312

IRS Released New Publication "Federal Tax Return Preparers: What You Need to Know"

The IRS released Publication 4938, Federal Tax Return Preparers: What You Need to Know. In it, the IRS discusses their new Annual Filing Season Program (AFSP) status, which replaces the RTRP status that was thrown out after Loving.


The AFSP program allows unenrolled practitioners to take CPE during the year in order to get limited representation rights for their clients. Becoming an AFSP also allows unenrolled practitioners to have their name in a searchable IRS database of all return preparers. Attorneys, CPAs, and EAs will have their names automatically entered into the database without need to report CPE to the IRS.


This is basically a compromise between the IRS and the unenrolled preparers after Loving. Now, unenrolled preparers will not need to pay a fee for a license and they can choose not to do CPE while still being able to prepare tax returns.


Relevant Citations:
IRS Publication 4938