The IRS's recently released 2005 Data Book gives taxpayers a glimpse at where the agency is focusing its audit priorities. Individuals and small businesses have strong chances of being audited. Statistics from the IRS's 2005 fiscal year (FY) show a 20 percent increase in individual audits and a similar jump in small business examinations.

Drawing conclusions from audit statistics must be measured by the various types of audits conducted. Not all audits, indeed very few, are full-blown, highly intrusive audits. Correspondence audits are the most common. In FY 2005, only about 20 percent of all audits were conducted in person by revenue agents or examiners.

Individual audit rate continues to climb

The overall audit rate for all individual returns continues to climb. In FY 2005, the audit rate for all individual returns was 0.93 percent, up from 0.77 percent for FY 2004.

The overall audit rate for all individuals is now about where it was 10 years ago before audit rates started falling. After Congress passed the IRS Restructuring and Reform Act of 1998, the IRS pulled employees off enforcement and into customer service. Since 2003, the IRS has been refocusing on enforcement.

The IRS assessed approximately $1.8 billion in civil penalties against individuals and $1 billion in interest in FY 2005. However, for about 40,000 taxpayers, the outcomes of their audits were better. They received refunds.

Targeting Schedule C filers

Schedule C is traditionally a gold mine for the IRS. In FY 2005, the IRS targeted Schedule C's showing receipts of $100,000 or more. Roughly 3.65 percent were selected for audit.

Corporate audit rates rise

Audit rates for all types of corporations increased in FY 2005. The audit rate for S corporations rose from 0.19 percent in FY 2004 to 0.30 percent in FY 2005. The audit rate for large corporations jumped from 16.7 percent in FY 2004 to 20 percent in FY 2005.

Return numbers increase

For FY 2005, more than 226 million returns were filed with the IRS. The number of individual returns the IRS receives far and away exceeds all other types of returns. In FY 2005, the IRS received 132.8 million individual returns, up from 131.3 million in FY 2004. Individual returns accounted for 59 percent of all returns filed with the IRS in FY 2005. Coming in second are employment tax returns at 30.8 million, which also showed an increase from FY 2004 figures.

Partnership returns showed a big increase from FY 2004. The IRS received 2.66 million returns from partnerships in FY 2005 up from 2.52 million in FY 2004. The increase in partnership returns at 5.7 percent was the highest in terms of growth by percentage.

S corporation returns also increased but at a slightly lower rate. The IRS received 3.63 million returns from S corps in FY 2005 up from 3.5 million in FY 2004. The percentage rate of increase was 3.7 percent.