IRS audits more millionaires and 6-figure filers

Individual audits up 6 percent overall, while S corporations and partnerships get more scrutiny.

By Jeanne Sahadi, senior writer

NEW YORK ( -- Uncle Sam has been in hotter pursuit of high-income taxpayers, according to the fiscal year 2006 audit figures released on Monday by the IRS.

This year, the IRS audited the returns of 17,015 tax filers reporting income of $1 million or more. That's up 33 percent from the 12,835 audits of million-dollar earners it conducted in fiscal year 2005.

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The IRS's audits of taxpayers with reported incomes above $100,000 rose 18 percent from last year, to more than 257,000 returns. That's considerably higher than the 92,000 returns at that income level audited in 2001.

Of the returns filed by taxpayers reporting income less than $100,000, the IRS audited 1,035,830 returns.

Overall, the agency audited nearly 1.3 million individual returns, up 6 percent from 2005. Three-quarters of the audits were correspondence audits, which are conducted by mail and typically deal with just one area of a return. The other quarter are the more rigorous field exams, which involve face-to-face meetings with the taxman.

Although the audits of corporations with assets of more than $10 million fell 2.2 percent, and the audits of small businesses remained about the same as last year (17,871 returns in 2006 vs. 17,858 in 2005), the IRS stepped up its examinations of S corporations and partnerships.

Audits of S corporations, which may have no more than 100 shareholders and the income from which may be reported on the shareholders' personal tax returns, jumped 34 percent to 13,894 returns, the highest level since 2000. Audits of partnerships, meanwhile, rose 15 percent to 9,777 returns. (See correction.)

As reported last week in a study from the Government Accountability Office, the stepped-up IRS enforcement efforts increased the agency's enforcement revenue by 3 percent to a record $48.7 billion.

Despite the increases in audits, the chances you will be audited still remain low, given that the IRS processes more than 130 million individual tax returns.

In mid-September (the tail end of fiscal year 2006), in a controversial move, the IRS began outsourcing some of its collection cases to private agencies. So far, the agencies have been assigned 13,750 cases worth $73.5 million in back taxes owed, said an IRS spokesman. Through the third week in October, they had collected $5.5 million of that amount.

(Learn more about critics' objections and what you can expect if a private collection agency comes calling to collect back taxes.)

The IRS's increased enforcement is part of the agency's effort to reduce the $345 billion tax gap - that's the estimated amount of back taxes owed but not paid.

Correction: An earlier version of this article incorrectly stated that S Corporations may not have more than 35 shareholders. The shareholder limit was increased by the American Jobs Creation Act of 2004. (Return to story.) Top of page

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