We’ve all heard how forming a business entity limits an owner’s personal liability.
What people don’t know is that forming a business entity can also lower your risk of being audited by the IRS.
At Gedeon Law & CPA, as part of our continued effort to provide our clients with proactive tax planning, we recently reviewed the IRS Data Book that details the audit examination data pertaining to 2011 tax returns filed during the fiscal year ended September 30, 2012.
What did we conclude from our examination of the IRS Data Book?
Well, as the data provided below shows, the good news is that for some taxpayers, there is a better chance the Toronto Maple Leafs will actually win a Stanley Cup this coming NHL season then there is being selected for audit by the IRS.
But if you are currently running your business as a Schedule C sole proprietorship or even a disregarded entity such as a single member LLC, then your chances of being audited are over three times higher than incorporating your business.
To help our clients understand their audit risk, we’ve put the following outline together that summarizes the statistics for being audited by the IRS depending on the type of return filed:
| Type of Return: Individual | # of Returns Filed | # Audited | % Audited |
| Income < $200,000, Sch. C or E < $25,000 | 10,400,000 | 122,000 | 1.2% |
| Income <$200,000, Sch. C or E > $100,000 | 1,400,000 | 50,000 | 3.5% |
| Income > $200,000 but < $1,000,000 | 4,400,000 | 140,000 | 3.2% |
| Income > $1,000,000 | 337,000 | 41,000 | 12.1% |
| Type of Return: Corporate | # of Returns Filed | # Audited | % Audited |
| Assets under $1,000,000 | 1,200,000 | 11,000 | 0.9% |
| Assets > $1,000,000 but < $10,000,000 | 190,000 | 4,000 | 2.1% |
| Assets > $10,000,000 | 58,000 | 10,000 | 17.2% |
| Type of Return: Pass-through | # of Returns Filed | # Audited | % Audited |
| Partnership return | 3,500,000 | 16,700 | 0.5% |
| S Corporation return | 4,400,000 | 22,000 | 0.5% |
The data shows that as your income rises, so does your risk of audit. For high net worth individuals making over $1,000,000 per year, there is a one-in-eight chance of being audited.
But here is where it gets interesting. If you’re self employed and your business grosses over $100,000 in revenue, then your risk of being audited is 3.5%. By comparison, a Corporation with under $1M in assets only has a 0.9% chance of having its return audited. That’s less than half the risk of facing off against the IRS as an unincorporated business. Your chances of not being audited get even better when you operate your business as a partnership or a S corporation because the audit risk drops down to a miniscule 0.5%.
With these numbers in mind, you don’t have to be a savvy gambler to realize how to play the game of audit roulette.
At Gedeon Law & CPA, we specialize in working with clients to form business entities. Our team of lawyers and CPA’s ensure you get the best advice on how to structure your business from a tax and legal standpoint. Contact us today and let our team of professionals’ help you form a business and take advantage of the many tax saving strategies available to business owners.
