TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Filing Characteristics and Examination Results for Partnerships and S Corporations

 

 

 

August 28, 2006

 

Reference Number:  2006-30-114

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

Phone Number   |  202-927-7037

Email Address   |  Bonnie.Heald@tigta.treas.gov

Web Site           |  http://www.tigta.gov

 

August 28, 2006

 

 

MEMORANDUM FOR COMMISSIONER, LARGE AND MID-SIZE BUSINESS DIVISION

                                         COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION

 

FROM:                            (for) Michael R. Phillips /s/ Michael E. McKenney

                                         Deputy Inspector General for Audit

 

SUBJECT:                    Final Audit Report – Filing Characteristics and Examination Results for Partnerships and S Corporations (Audit # 200530019)

 

This report presents the results of our review of statistical information reflected in the filings and examinations of partnership and S corporation[1] tax returns.  Our overall objective was to analyze the filing characteristics and examination trends of these flowthrough entities.[2]  We conducted the review at our own initiative to highlight the important role the National Research Program (NRP) study plays in understanding what the rapid growth in filings of partnership and S corporation returns means for tax compliance.  It has been more than 20 years since the Internal Revenue Service (IRS) studied how well these entities comply with tax laws.  Since that study, flowthrough entities have become the fastest growing segments filing income tax returns with the IRS and are annually passing hundreds of billions of dollars in income and losses to their partners and shareholders.

Synopsis

We conducted the review at our own initiative to highlight the important role the NRP study plays in understanding what the rapid growth in filings of partnership and S corporation returns means for tax compliance.

From a practical standpoint, partnerships and S corporations have long provided a popular way of protecting income from taxation by having the legal capacity to offset wages and other income sources that partners and shareholders report on their tax returns.  Changes in the legal and regulatory environment in the 1990s contributed to their popularity.  Specifically, the legal and regulatory changes involved the creation of Limited Liability entities[3] and the issuance of so-called Check-the-Box Regulations[4] by the Federal Government.  In 2004, the IRS processed approximately 1.19 million returns filed by Limited Liability entities, which was an 83 percent increase over the 650,000 returns from Limited Liability entities processed in 2000.

Like partnerships, S corporations have the legal capacity to offset income sources that shareholders report on their income tax returns.  Additionally, S corporations provide their shareholders with the ability to save on the amount of employment taxes they would otherwise have to pay under most other types of business organizations.  The prospect of offsetting income sources of shareholders and minimizing the amount of employment tax that must be paid can be particularly attractive benefits and could be reasons S corporations have become the most common type of corporate entity filing income tax returns with the IRS.

The IRS NRP study is fully underway studying the extent to which S corporations and their shareholders comply with the tax laws.  From a compliance perspective, this effort and another one under consideration for partnerships are critically important for a number of reasons.  Most important, perhaps, is that the study results are expected to enhance the IRS examination process that helps ensure taxes on the hundreds of billions of dollars of income and losses passing through these entities to shareholders and partners are reported and paid.  The statistical validity and comprehensiveness of the NRP study is designed to provide the IRS with updated compliance data needed for deciding which partnership and S corporation returns should be examined and how best to focus millions of dollars of examination resources on the most significant areas of noncompliance.

The IRS last collected data on how well partnerships and S corporations comply with tax laws more the 20 years ago, and over time these data have become less reliable for examination workload selection.  The IRS increasingly selects partnership and S corporation returns for examination under special projects to address specific types of noncompliance such as abusive tax schemes and transactions.  Additionally, IRS executives have invested considerable efforts in various initiatives aimed at making the examination process more efficient.

Although we did not measure the impact these various projects and initiatives have had on the examination process, IRS statistics show the numbers of partnership and S corporation examinations are increasing and examiners are spending less time on the examinations while making more adjustments to the tax returns.  Despite these positive trends, the number of examinations that are closed with no adjustment continues to be high and could likely be reduced with NRP study data to assist in the identification, selection, and examination processes.  In Fiscal Year 2005, 44 percent of partnership and 43 percent of S corporation examinations resulted in no adjustments.  This no-change rate means a significant amount of resources are being devoted to unproductive examinations, and compliant partnerships and S corporations are being unnecessarily burdened.

Besides updating workload selection formulas, the NRP study data are expected to be used for other important tax administration activities such as identifying areas where instructions and prefiling taxpayer services could be improved, suggesting legislative changes, and refining estimates of the tax gap (i.e., the amount of taxes owed but not voluntarily paid).  Because of these benefits, numerous stakeholders, including the Treasury Inspector General for Tax Administration, Government Accountability Office, and IRS Oversight Board,[5] support the program.

Recommendations

We made no recommendations in this report.  However, key IRS management officials reviewed the report prior to issuance.

Copies of this report are also being sent to the IRS managers affected by the report information.  Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Small Business and Corporate Programs), at (202) 622‑8500.

 

 

Table of Contents

 

Background

Results of Review

Partnerships and S Corporations Are the Fastest Growing Segments of Taxpayers Filing Tax Returns With the Internal Revenue Service

National Research Program Results Are Critical to Understanding the Impact Partnerships and S Corporations Are Having on Compliance

Appendices

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Detailed Figures of Statistical Information

 

 

Abbreviations

 

AIMS

Audit Information Management System

BRTF

Business Return Transaction File

FY

Fiscal Year

IRS

Internal Revenue Service

LLC

Limited Liability Company

LLP

Limited Liability Partnership

NRP

National Research Program

PY

Processing Year

TCMP

Taxpayer Compliance Measurement Program

TIGTA

Treasury Inspector General for Tax Administration

TY

Tax Year

 

 

Background

 

We conducted this review at our own initiative to highlight the important role the National Research Program (NRP) study has in understanding what the rapid growth in filings of partnership and S corporation[6] returns means for tax compliance.  The NRP study is fully underway studying the extent to which S corporations and their shareholders comply with the tax laws.  The study involves the identification, selection, and examination of approximately 5,000 tax returns filed by S corporations and processed by the Internal Revenue Service (IRS) for Tax Years (TY) 2003 and 2004.  Statistically valid sampling techniques are being used so the results from the examinations can reliably measure the level of compliance in the universe of S corporations filing tax returns.

From a compliance perspective, this effort and another one under consideration for partnerships are critically important for several reasons.  Most important, perhaps, is that the study results are expected to improve the IRS examination process by helping ensure the taxes on hundreds of billions of dollars of income and losses passing through these entities are reported and paid properly.  The statistical validity and comprehensiveness of the NRP study is designed to provide the IRS with updated compliance data needed for deciding which partnership and S corporation returns should be examined and how best to focus millions of dollars of examination resources on the most significant areas of noncompliance.

During the review, we relied on computer programs to obtain data from IRS databases.  In testing the data, we noted there were some data elements missing from the databases.  This can occur when information is not included on a tax return when it is filed.  We also matched a database containing tax return information with one containing examination results.  As part of this matching process, we were unable to match all records in the databases.  Where information was missing or records were unable to be matched, we noted this by using the term “Unknown” in the figures presented throughout the report.

The review was performed at the Treasury Inspector General for Tax Administration (TIGTA) Office of Audit in Los Angeles, California, during the period August 2005 through July 2006.  The audit was conducted in accordance with Government Auditing Standards.  Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.  Detailed figures referred to in the body of the report are included in Appendix IV.  Many of the calculations throughout the report and Appendix IV are affected by rounding.  All initial calculations were performed using actual numbers rather than the rounded numbers that appear in the report.  The report does not include examination results from the Coordinated Industry Case Program[7] because relatively few entities are examined under this Program, and the examination procedures and techniques differ from the vast majority of other examinations conducted by the IRS. 

 

 

Results of Review

 

Partnerships and S Corporations Are the Fastest Growing Segments of Taxpayers Filing Tax Returns With the Internal Revenue Service

From a practical standpoint, partnerships and S corporations have long provided a popular way of protecting income from taxation because they have the legal capacity to offset wages and other income sources that partners and shareholders report on their tax returns.  Organizing a business as a partnership or an S corporation also allows these entities, as well as their partners and shareholders, to avoid double taxation on business profits.  This treatment is unlike the traditional corporation that incurs a tax liability first at the corporate level and again when business profits are distributed to shareholders in the form of dividends.  As illustrated in Appendix IV, operating as a partnership or S corporation can result in considerable tax savings.

Between January 2000 and December 2004, the number of partnership and S corporation tax returns processed annually by the IRS grew 21 percent, from 4.96 million to 6 million.  By 2012, the IRS is projecting this number will increase another 42 percent to approximately 8.49 million.

Limited Liability entities[8] are a driving factor in the growth rate of partnerships filing tax returns

Changes in the legal and regulatory environment in the 1990s contributed to making partnerships the fastest growing segment of all filers of tax returns with the IRS.  Specifically, the changes involved the creation of Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP)[9] by State governments and the issuance of the so-called Check-the-Box Regulations[10] by the Federal Government.  In 2004, the IRS processed approximately 1.19 million returns filed by Limited Liability entities.  This was an 83 percent increase over the nearly 650,000 returns from Limited Liability entities processed in 2000 and represented 47 percent of partnership returns processed in 2004 (see Figure 1).[11]



Figure 1:  Numbers and Types of Partnership Returns Processed
in Processing Years (PY) 2000 – 2004

 

Type of Partnership

 

Processing Years[12]

Percentage Change

 

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

General Partnership

918,631

876,586

832,843

796,323

762,719

-16.97%

Limited Partnership (┼)

362,595

370,533

384,120

394,287

402,840

11.10%

LLC

606,760

714,048

832,268

962,894

1,106,678

82.39%

LLP (┼)

43,049

59,006

65,646

73,927

81,189

88.60%

All other (√)

134,093

143,662

151,057

165,656

170,463

27.12%

Totals

2,065,128

2,163,835

2,265,934

2,393,087

2,523,889

22.21%

(┼) A limited partnership is one with at least one general partner in which limited partners can purchase an interest and be liable only to the extent of their interests and not risk personal liability.  In an LLP, each partner is fully liable for the debts of the partnership but not for acts of professional negligence or malpractice committed by the other partners.
(√) All other includes other partnerships and foreign partnerships for which the IRS began collecting data in PY 2001 and partnerships with no entity designation.

Source:  TIGTA analysis of the IRS Business Return Transaction File (BRTF)[13] for PYs 2000 - 2004.

As with all partnerships, most LLC partnership returns processed in 2000 through 2004 were concentrated in the finance/insurance industry sector and real estate industry sector.  During this 5-year period, these 2 industry sectors filed 52.25 percent of all partnership returns processed.  They reported accumulating $7.3 trillion in assets and distributing $68 billion of income and $36 billion in losses to their partners.  The $7.3 trillion in assets represented 74 percent of the total assets on all partnership returns processed in 2004.

Partnership returns in the finance/insurance industry sector and real estate industry sector also were more likely to be linked to other partnerships.  These linkages are referred to as tiered partnerships and generally involve a partnership that owns or is owned by one or more other partnerships.  Tiered partnership returns processed in 2000 through 2004 for the real estate industry sector grew at a rate of 27.36 percent, while those in the finance/insurance industry sector grew by more than 50 percent.  Of those partnerships with less than $250,000 in total assets, only 11 percent were linked to other partnerships while 72.75 percent of those with over $250 million in assets were linked to other partnerships.

Most S corporations have less than $10 million in assets and only 1 shareholder

The growth in the number of S corporation returns processed from 2000 through 2004 continued a trend that was started in 1997 when they became the most common type of corporate entity filing income tax returns.  In 2004, the IRS processed approximately 3.5 million S corporation returns.  This was a 21 percent increase over the 2.89 million S corporation returns processed in 2000.  S corporations with assets of less than $10 million represented over 99 percent of the S corporations filed in 2004 (see Figure 2).

Figure 2:  Numbers and Types of S Corporation Returns
Processed in PYs 2000 – 2004

 

Asset Classification

 

Processing Years

 

Change

Percentage
Change

 

 

2000

 

2001

 

2002

 

2003

 

2004

PY 2000

to
PY 2004

PY 2000

to
PY 2004

Under $250,000

2,262,371

2,359,609

2,477,088

2,628,151

2,746,315

483,944

21.39%

$250,000 to under $1 million

 

404,521

 

425,186

 

446,401

 

463,983

 

478,266

 

73,745

 

18.23%

$1 million to under $5 million

 

173,570

 

182,275

 

191,358

 

197,359

 

202,867

 

29,297

 

16.88%

$5 million to under $10 million

 

27,180

 

29,076

 

29,898

 

31,073

 

31,952

 

4,772

 

17.56%

Totals less than $10 million

 

2,867,642

 

2,996,146

 

3,144,745

 

3,320,566

 

3,459,400

 

591,758

 

20.64%

$10 million to under $50 million

 

19,469

 

21,336

 

22,124

 

23,025

 

24,347

 

4,878

 

25.06%

$50 million to under $100 million

 

1,846

 

2,053

 

2,297

 

2,418

 

2,524

 

678

 

36.73%

$100 million to under $250 million

 

1,016

 

1,126

 

1,374

 

1,383

 

1,449

 

433

 

42.62%

$250 million and over

462

602

952

668

660

198

42.86%

Totals $10 million or more

 

22,793

 

25,117

 

26,747

 

27,494

 

28,980

 

6,187

 

27.14%

Grand Totals

2,890,435

3,021,263

3,171,492

3,348,060

3,488,380

597,945

20.69%

Source:  TIGTA analysis of the S corporation BRTF for PYs 2000 - 2004.

Unlike partnerships, the S corporation filings were distributed over a wider variety of industries[14] although most S corporation tax returns processed in 2000 through 2004 were concentrated in a variety of service industry sectors.  In 2004, the service industry sectors filed 31.26 percent of all S corporation returns processed.  That same year, the service industry sectors reported holding $246 billion in assets and distributing $50 billion of income and $13.8 billion in losses to their shareholders.  However, the $246 billion in assets represented only 11 percent of the total assets on all S corporation returns processed in 2004.

S corporations additionally provide shareholders with the ability to save on the amount of employment taxes they would have to pay if they were structured as sole proprietorships or partnerships.  Continuing a trend that has existed for many years, S corporations owned by a sole shareholder dominated the data.  Of the 3.45 million S corporation tax returns processed in 2004, approximately 54 percent had sole ownership (see Figure 3).  As we have previously reported,[15] single ownership in an S corporation has the benefit of allowing owners to pay employment taxes on only the portion of profits they decide to pay themselves as a salary.  This is very different from a sole proprietorship[16] that pays employment taxes based on a percentage of all profits.  Single owners of S corporations annually paid themselves an average of $33,853 on returns filed in 2004.  In contrast, these same S corporation returns reported average operating profits of $34,683 after taking deductions for officers’ salaries.  This permitted sole-shareholder S corporations to save nearly $8.4 billion in employment taxes in TY 2003, or $4,504 on average.  The prospect of offsetting income sources of shareholders or minimizing the amount of employment taxes that must be paid can be particularly attractive benefits and may be a primary reason why S corporations have become the most common type of corporate entity filing income tax returns with the IRS.

Figure 3 was removed due to its size.  To see Figure 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

National Research Program Results Are Critical to Understanding the Impact Partnerships and S Corporations Are Having on Compliance

The IRS last collected data on how well partnerships and S corporations comply with the tax law more the 20 years ago under its Taxpayer Compliance Measurement Program (TCMP).[17]  As we reported in 2004,[18] these data are out of date and, accordingly, less reliable for identifying, selecting, and examining the tax returns that pose the greatest compliance risk.  The IRS, as a result, increasingly selects partnership and S corporation returns for examination under special projects to address specific types of noncompliance such as tax shelters.  Additionally, IRS executives have invested considerable efforts in various initiatives aimed at making the examination process more efficient.  Although we did not measure the impact these various projects and initiatives have had on the examination process, IRS statistics show the numbers of partnership and S corporation examinations are increasing and examiners are spending less time on the examinations while making more adjustments to the tax returns.  Despite these positive trends, the number of examinations closed with no adjustment continues to be high and could likely be reduced with NRP data to assist in the identification, selection, and examination processes.

The numbers of partnership and S corporation examinations are increasing and will likely continue to do so in the future

Although the IRS has historically emphasized examining taxable entities, such as sole proprietorships, it is moving away from this emphasis and towards one that is focused on maintaining examination coverage across all filing segments and on areas presenting the highest compliance risk.  This new focus will likely contribute to an increase in the numbers of partnership and S corporation tax returns examined if coverage is to be maintained over the growing number of tax returns expected to be filed by these entities.  The IRS closed 37 percent more partnership examinations and 63 percent more S corporation examinations in Fiscal Year (FY) 2005 than it did in FY 2004 (see Figure 4).  The increases occurred in nearly every size of partnership and S corporation but generally varied by industry segment.[19]



Figure 4:  FYs 2004 and 2005 Partnership and S Corporation
Examination Closures, by Total Assets

 

Partnership Returns Examined

S Corporation Returns Examined

Total Assets

FY 2004

FY 2005

Percentage
Change

FY 2004

FY 2005

Percentage
Change

 

Under $250,000

2,199

3,544

61%

3,473

5,737

65%

 

$250,000 to under $1 million

622

1,035

66%

616

1,189

93%

 

$1 million to under $5 million

838

1,243

48%

617

1,353

119%

 

$5 million to under $10 million

356

469

32%

282

569

102%

 

$10 million to under
$50 million

 

982

 

935

 

-5%

 

795

 

1,063

 

34%

 

$50 million to under
$100 million

 

272

 

286

 

5%

 

132

 

150

 

14%

 

$100 million to under
$250 million

 

290

 

307

 

6%

 

91

 

106

 

16%

 

$250 million and over

348

409

18%

58

42

-28%

 

Unknown

254

187

-26%

336

201

-40%

 

Totals

6,161

8,415

37%

6,400

10,410

63%

 

Source:  TIGTA analysis of the Audit Information Management System (AIMS)[20] for partnership and S corporation return examinations completed in FYs 2004 and 2005.

In terms of areas presenting the greatest compliance risk, the IRS has identified abusive tax schemes and transactions as a priority area for increased examination activity.  This focus has increased and will likely continue to increase the numbers of partnership and S corporation returns that are examined.  In 2000, the IRS published guidance on 10 transactions that could trigger an examination because they purportedly abuse the tax law, represent a significant loss of tax revenue, and undermine the public’s confidence in the tax system.  By 2004, there were 31 such transactions, 9 (29 percent) of which required the involvement of a partnership or an S corporation in the transaction.

Partnership and S corporation examinations are taking less time and generating more adjustments to items reported on the tax returns

IRS surveys have shown consistently that business taxpayers believe the examination process is too long and consumes too much time.  To address this issue and better leverage its examination resources, IRS executives have invested considerable effort in developing and implementing work process changes focused on reducing the length of examinations.  Although we did not measure the impact the efforts have had on examinations, IRS statistics show that both the number of hours and number of calendar days spent on partnership and S corporation examinations decreased between FYs 2004 and 2005.  The average number of days decreased nearly 19 percent, and the number of hours decreased nearly 34 percent on partnership examinations (see Figure 5).[21]  Similar trends existed for S corporations during the period.[22]

Figure 5:  Comparison Between the Numbers of Calendar Days and Hours Spent on Partnership Examinations in FYs 2004 and 2005, by Total Assets

 

Average Number of Days

Average Number of Hours

Total Assets

FY 2004

FY 2005

Percentage
Change

FY 2004

FY 2005

Percentage
Change

 

Under $250,000

495

456

-7.88%

43.80

38.99

-10.98%

 

$250,000 to under $1 million

530

350

-33.96%

48.69

36.13

-25.80%

 

$1 million to under $5 million

551

386

-29.95%

55.95

34.49

-38.36%

 

$5 million to under $10 million

511

521

1.96%

79.15

50.74

-35.89%

 

$10 million to under
$50 million

 

482

 

516

 

7.05%

 

114.35

 

79.60

 

-30.39%

 

$50 million to under
$100 million

 

479

 

581

 

21.29%

 

138.20

 

103.85

 

-24.86%

 

$100 million to under
$250 million

 

544

 

554

 

1.84%

 

150.41

 

84.65

 

-43.72%

 

$250 million and over

735

625

-14.97%

304.24

149.88

-50.74%

 

Unknown

2,521

1,585

-37.13%

36.26

31.51

-13.10%

 

Totals

590

478

-18.98%

73.87

48.89

-33.82%

 

Source:  TIGTA analysis of the AIMS for partnership and S corporation return examinations completed in FYs 2004 and 2005.

While the time and length of partnership and S corporation examinations are trending downward, the amount of examination adjustments made to items reported on the tax returns increased 81 percent between FYs 2004 and 2005.[23]  When analyzing the examination adjustments, it is important to recognize what they do and do not represent.  The examination adjustments, in general, measure only the items or portion of items the examiner believes were not properly reported on the tax return when it was filed.  Examination adjustments do not measure the amount of taxes that ultimately will be assessed.  Generally, the taxes assessed are significantly lower than the adjustments recommended by examiners to the items on the tax returns.

At the close of an examination, the partners or shareholders may either agree or disagree with the examiner’s determination.  If the partners or shareholders agree, the examination adjustments are passed through to their individual tax returns where the taxes are computed based on their income tax brackets and percentage ownership in the entity.  For example, if adjustments of $4,000 were made to the deductions on a tax return of an S corporation that had 2 equal shareholders who were in the maximum 35 percent tax bracket, each shareholder would be assessed $700 (50 percent of $4,000 multiplied by the 35 percent tax rate).  If the partners or shareholders disagree with the examiner’s determination, the dispute is generally settled through the IRS appeals process or the court system, both of which can significantly reduce or even eliminate the adjustments.

Due to limitations with the IRS databases, we were unable to determine the tax assessments from partnership and S corporation examinations.  However, the databases do track the amount of recommended adjustments and show that these entities are agreeing to more recommended adjustments.  Nonetheless, the entities agreed with only 42 percent of the adjustments recommended in FY 2005 (see Figure 6).  They continued to disagree with most adjustments.  In FY 2005, partnerships and S corporations disagreed with 58 percent of the $6.2 billion in recommended adjustments.[24]

Figure 6 was removed due to its size.  To see Figure 6, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

The numbers of partnership and S corporation examinations that result in no adjustments remains a concern

Despite the positive trends in examination results, the large numbers of partnership and S corporation examinations closed with no adjustments will likely continue without NRP data to assist in the identification, selection, and examination processes.  As the IRS reported to Congress in 2003, this no-change rate means a significant amount of resources are being devoted to unproductive examinations, and compliant partnerships and S corporations are being unnecessarily burdened.

In FY 2005, 44 percent of partnership and 43 percent of S corporation examinations resulted in no adjustments.  From FY 2004, this was a 16 percent increase for partnerships and a 48 percent increase for S corporations (see Figure 7).  The no-change rates in FYs 2001, 2002, and 2003 for partnerships were in the upper 40 percent range, while for S corporations they were in the upper 30 percent range.[25]


Figure 7:  FYs 2004 and 2005 Partnership and S Corporation
No-Change Examination Results, by Total Assets

 

Percentage of Partnership Return Examinations With No Changes

Percentage of S Corporation Return Examinations With No Changes

Total Assets

FY 2004

FY 2005

Percentage
Change

FY 2004

FY 2005

Percentage
Change

 

Under $250,000

33.93%

41.86%

23.40%

29.62%

40.55%

36.92%

 

$250,000 to under $1 million

33.93%

55.40%

63.30%

21.92%

40.69%

85.67%

 

$1 million to under $5 million

38.68%

52.79%

36.48%

21.79%

52.48%

140.84%

 

$5 million to under $10 million

47.99%

42.17%

-12.13%

24.11%

55.71%

131.04%

 

$10 million to under
$50 million

 

48.83%

 

38.66%

 

-20.83%

 

41.27%

 

45.52%

 

10.32%

 

$50 million to under
$100 million

 

49.54%

 

37.60%

 

-24.10%

 

38.64%

 

31.29%

 

-19.01%

 

$100 million to under
$250 million

 

31.11%

 

38.03%

 

22.25%

 

34.44%

 

36.79%

 

6.82%

 

$250 million and over

27.44%

28.72%

4.66%

20.00%

35.90%

79.49%

 

Unknown

29.61%

28.33%

-4.32%

23.33%

29.35%

25.80%

 

Totals

37.94%

44.13%

16.32%

29.16%

43.05%

47.62%

 

Source:  TIGTA analysis of the AIMS for partnership and S corporation return examinations completed in FYs 2004 and 2005.

IRS officials told us they are concerned with the trend in the number of no-change examinations and are evaluating closed examination case files to determine if factors other than the absence of current compliance data may be contributing to the no-change rates.  Additionally, officials noted that the productivity from partnership and S corporation examinations may be higher than reflected by the no-change rate because the IRS reports the results as a no-change when the adjustments do not change the partnership or S corporation tax return, but do change a partner or shareholder tax return. 

Besides providing updated data for deciding which tax returns should be examined, the NRP study data are expected to be used for such other important tax administration activities as identifying areas in which instructions and prefiling taxpayer services could be improved, suggesting legislative changes, and refining estimates of the tax gap (i.e., the amount of taxes owed but not voluntarily paid).  Because of its benefits, numerous stakeholders support the NRP.  In addition to the TIGTA, the Government Accountability Office has discussed and reiterated the need for such compliance data in several reports and Congressional testimony.[26]  The IRS Commissioner has indicated the NRP is critical for measuring the level and sources of noncompliance.  In its FY 2001 annual report, the IRS Oversight Board[27] supported the effort and solicited Congressional support for the Program.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of the review was to analyze the filing characteristics and examination trends of flowthrough entities.[28]  We used computer programs to obtain data from the IRS BRTF[29] and AIMS.[30]  We did not audit to determine the accuracy and reliability of the information in any of the databases.  However, we assessed the reasonableness and completeness of the data analyzed as outlined in Steps III. and IV.  To accomplish our objective, we:

 I.               Analyzed extracts from the IRS BRTF to assess the filing characteristics and trends of partnership and S corporation returns processed in PYs 2000 through 2004.

II.               Analyzed extracts from the IRS AIMS to assess the characteristics and trends of partnership and S corporation examinations closed in FYs 2001 through 2005.

III.               Compared extracts from the IRS BRTF to the IRS Data Books[31] to provide assurances the data analyzed were reasonable and complete.

IV.               Compared extracts from the IRS AIMS to the IRS Table 37, Examination Program Monitoring, to provide assurances the data analyzed were reasonable and complete. 

 

Appendix II

 

Major Contributors to This Report

 

Daniel R. Devlin, Assistant Inspector General for Audit (Small Business and Corporate Programs)

Kyle Andersen, Director

Frank Dunleavy, Audit Manager

Earl Charles Burney, Lead Auditor

William Tran, Senior Auditor

Layne Powell, Information Technology Specialist

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Services and Enforcement  SE

Deputy Commissioner, Large and Mid-Size Business Division  SE:LM

Deputy Commissioner, Small Business/Self-Employed Division  SE:S

Director, Research, Office of Research, Analysis, and Statistics  RAS

Director, Examination, Small Business/Self-Employed Division  SE:S:E

Director, Research, Small Business/Self-Employed Division  SE:S:R

Director, Strategy, Research, and Program Planning, Large and Mid-Size Business Division  SE:LM:SR

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Internal Control  OS:CFO:CPIC:IC

Audit Liaisons:

Commissioner  C

Deputy Commissioner for Services and Enforcement  SE

Commissioner, Large and Mid-Size Business Division  SE:LM

Commissioner, Small Business/Self-Employed Division  SE:S

 

Appendix IV

 

Detailed Figures of Statistical Information

 

Figure 1 – Income Tax Advantages of Flowthrough Entities

Figure 2 – Partnership Filings by Asset Class

Figure 3 – S Corporation Filings by Asset Class

Figure 4 – Partnership Filings by Type of Entity Classification

Figure 5 – Composition of Partnership Entity Filings (PYs 2000 and 2004)

Figure 6 – Industry Composition of Partnership Filings (PY 2004)

Figure 7 – Industry Composition of S Corporation Filings (PY 2004)

Figure 8 – Partnership Filings by Industry Classification

Figure 9 – S Corporation Filings by Industry Classification

Figure 10 – Ownership of Partnerships (PY 2004)

Figure 11 – Ownership of S Corporations (PY 2004)

Figure 12 – Tiered Partnership Filings by Asset Class

Figure 13 – Top 5 Industry Classifications of Tiered Partnership Filings With Assets of $10 Million or More

Figure 14 – Partnership Return Examinations by Asset Class

Figure 15 – S Corporation Return Examinations by Asset Class

Figure 16 – Top 5 Industry Classifications of Partnership Return Examinations

Figure 17 – Top 5 Industry Classifications of S Corporations Return Examinations

Figure 18 – Partnership Return Examinations by Type of Entity Classification

Figure 19 – Partnership Return Examination No-Change Rates by Asset Class

Figure 20 – S Corporation Return Examination No-Change Rates by Asset Class

Figure 21 – Partnership Adjustments

Figure 22 – S Corporation Adjustments

Figure 23 – Partnership Unagreed and Agreed Examination Results by Asset Class (FYs 2004 – 2005)

Figure 24 – S Corporation Unagreed and Agreed Examination Results by Asset Class (FYs 2004 – 2005)

Figure 25 – Partnership Examination Hours per Return by Asset Class

Figure 26 – S Corporation Examination Hours per Return by Asset Class

Figure 27 – Partnership Examination Cycle Time per Return by Asset Class

Figure 28 – S Corporation Examination Cycle Time per Return by Asset Class

 

Figure 1:  Income Tax Advantages of Flowthrough Entities.  One benefit of operating as a partnership or S corporation is that business profits are taxed only once, rather than twice like a conventional corporation.  This can be illustrated with the following example assuming the maximum corporate and individual tax rates are applicable for the entities involved and all profits are remitted to the owners.  In a conventional corporation, $1,000 of business profits is first taxed at the corporate level, resulting in $350 in corporate income tax ($1,000 multiplied by the 35 percent maximum corporate tax rate), with the remaining $650 being paid to the shareholder as a dividend.  The $650 dividend is subject to a special 15 percent tax rate for dividends at the individual level for a personal income tax of $97.50 ($650 multiplied by the 15 percent).  As a result, the total tax on $1,000 of corporate earnings is $447.50.  In contrast, $1,000 of business profits in a flowthrough entity (partnership or S corporation) is taxed only once at the individual level, resulting in a tax of $350 ($1,000 multiplied by the 35 percent individual tax rate).

The chart was removed due to its size.  To see the chart, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Figure 2:  Partnership Filings by Asset Class.  Partnership filings grew 22.21 percent in PYs 2000 - 2004.  Partnerships reporting assets of over $10 million grew 36.71 percent, while those reporting assets of $10 million and under grew 21.81 percent.

 

 

Processing Years

Percentage Change

 

Asset Class

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 - 2004

Under $250,000

1,319,655

1,351,902

1,389,769

1,482,285

1,554,061

17.76%

$250,000 to under $1 million

374,111

400,938

427,266

439,215

466,473

24.69%

$1 million to under $5 million

266,406

293,183

317,943

334,975

359,028

34.77%

$5 million to under $10 million

48,798

54,725

60,240

64,144

67,555

38.44%

$10 million to under
$50 million

 

42,451

 

47,885

 

53,292

 

55,173

 

58,562

 

37.95%

$50 million to under
$100 million

 

6,223

 

6,912

 

7,878

 

7,737

 

8,130

 

30.64%

$100 million to under
$250 million

 

4,355

 

4,830

 

5,496

 

5,497

 

5,705

 

31.00%

$250 million and over

3,129

3,460

4,050

4,061

4,375

39.82%

Totals

2,065,128

2,163,835

2,265,934

2,393,087

2,523,889

22.21%

Source:  TIGTA analysis of the partnership BRTF[32] for PYs 2000 - 2004.

Figure 3:  S Corporation Filings by Asset Class.  S corporation filings grew 20.69 percent in PYs 2000 - 2004.  S corporations reporting assets of over $10 million grew 27.14 percent, while those reporting assets of $10 million or under grew 20.64 percent.

 

 

Processing Years

Percentage Change

 

Asset Class

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

Under $250,000

2,262,371

2,359,609

2,477,088

2,628,151

2,746,315

21.39%

$250,000 to under $1 million

404,521

425,186

446,401

463,983

478,266

18.23%

$1 million to under $5 million

173,570

182,275

191,358

197,359

202,867

16.88%

$5 million to under $10 million

27,180

29,076

29,898

31,073

31,952

17.56%

$10 million to under
$50 million

 

19,469

 

21,336

 

22,124

 

23,025

 

24,347

 

25.06%

$50 million to under
$100 million

 

1,846

 

2,053

 

2,297

 

2,418

 

2,524

 

36.73%

$100 million to under
$250 million

 

1,016

 

1,126

 

1,374

 

1,383

 

1,449

 

42.62%

$250 million and over

462

602

952

668

660

42.86%

Totals

2,890,435

3,021,263

3,171,492

3,348,060

3,488,380

20.69%

Source:  TIGTA analysis of the S corporation BRTF for PYs 2000 - 2004.

Figure 4:  Partnership Filings by Type of Entity Classification.  Overall partnership filings grew 22.21 percent.  In PYs 2000 - 2004, components grew as follows:  LLCs 82.39 percent, LLPs 88.60 percent, and Limited Partnerships 11.10 percent.  General partnerships declined nearly 17 percent over the same period.  Foreign partnerships grew 79.48 percent, and other partnerships grew 32.78 percent.

 

 

Processing Years

Percentage Change

 

Partnership Classification

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

General Partnership

918,631

876,586

832,843

796,323

762,719

-16.97%

Limited Partnership

362,595

370,533

384,120

394,287

402,840

11.10%

LLC

606,760

714,048

832,268

962,894

1,106,678

82.39%

LLP

43,049

59,006

65,646

73,927

81,189

88.60%

Foreign Partnership[33]

 

2,178

3,033

3,530

3,909

79.48%

Other[34]

 

6,650

7,737

8,393

8,830

32.78%

Unknown

134,093

134,834

140,287

153,733

157,724

17.62%

Totals

2,065,128

2,163,835

2,265,934

2,393,087

2,523,889

22.21%

Source:  TIGTA analysis of the partnership BRTF for PYs 2000 - 2004.

Figure 5:  Composition of Partnership Entity Filings (PYs 2000 and 2004).  LLCs increased from 29 percent to 44 percent of partnerships, while General Partnerships decreased from 45 percent to 30 percent and Limited Partnerships decreased from 18 percent to 16 percent.

Figure 5 was removed due to its size.  To see Figure 5, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 6:  Industry Composition of Partnership Filings (PY 2004).  The top 5 industry classifications accounted for 71 percent of all partnership filings in PY 2004.  “Real Estate and Rental & Leasing” and “Finance/Insurance” made up 53 percent of these partnership filings in PY 2004.

Figure 6 was removed due to its size.  To see Figure 6, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 7:  Industry Composition of S Corporation Filings (PY 2004).  The top 5 industry classifications accounted for 72 percent of the S corporation filings in PY 2004.  Service sector industries made up 31 percent of these S corporation filings in PY 2004.

Figure 7 was removed due to its size.  To see Figure 7, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 8:  Partnership Filings by Industry Classification.  Partnership returns processed in PYs 2000 - 2004 were concentrated in the real estate and finance/insurance industry sectors.  The top 5 industry categories of partnerships grew 28 percent.

 

 

Processing Years

Percentage Change

 

Industry Classification

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

1. Real Estate and Rental & Leasing

 

832,348

 

878,128

 

925,188

 

1,001,047

 

1,067,465

 

28.25%

2. Finance/Insurance

210,971

240,095

259,380

271,205

276,636

31.13%

3. Professional, Scientific, and Technical Services

 

127,744

 

135,935

 

144,795

 

154,326

 

160,963

 

26.00%

4. Construction

113,797

120,903

128,200

133,918

140,783

23.71%

5. Other Than a Type of Service

 

103,056

 

107,456

 

109,211

 

124,814

 

137,384

 

33.31%

Totals for Top 5 Industries

 

1,387,916

 

1,482,517

 

1,566,774

 

1,685,310

 

1,783,231

 

28.48%

Retail Trade

107,712

109,850

113,064

121,539

128,355

19.16%

Agriculture, Forestry, Fishing, and Hunting

 

116,885

 

119,331

 

121,205

 

125,534

 

127,475

 

9.06%

Other Services

60,656

63,183

66,773

72,772

77,503

27.77%

Accommodation and Food Services

 

58,861

 

62,565

 

66,356

 

72,157

 

76,546

 

30.05%

Health Care and Social Assistance

 

37,254

 

39,626

 

42,615

 

46,153

 

49,087

 

31.76%

Manufacturing

33,250

35,293

36,736

39,915

41,833

25.81%

Wholesale Trade

28,503

31,134

33,266

35,519

38,173

33.93%

Arts, Entertainment, and Recreation

 

26,965

 

28,703

 

30,773

 

33,430

 

35,436

 

31.41%

Administration and Support, Waste Management, and Remediation Services

 

 

23,391

 

 

26,104

 

 

28,653

 

 

32,328

 

 

34,611

 

 

47.97%

Transportation and Warehousing

 

21,099

 

23,184

 

24,902

 

27,388

 

28,791

 

36.46%

Information

21,105

22,812

23,663

26,366

27,969

32.52%

Mining

23,876

24,269

25,032

26,222

26,875

12.56%

Management of Companies and Enterprises

 

11,684

 

13,148

 

14,644

 

17,399

 

18,520

 

58.51%

Education Services

4,029

4,341

4,797

5,361

5,857

45.37%

Service Type of Business

7,372

8,274

7,823

7,296

5,582

-24.28%

Utilities

2,107

2,315

2,448

2,579

2,704

28.33%

Unknown

92,463

67,186

56,410

15,819

15,341

-83.41%

Totals

2,065,128

2,163,835

2,265,934

2,393,087

2,523,889

22.21%

Source:  TIGTA analysis of the partnership BRTF for PYs 2000 - 2004.

 

Figure 9:  S Corporation Filings by Industry Classification.  The top 5 industry categories of S corporations grew 30 percent in PYs 2000 - 2004.  Industry classifications in the service sector grew 30 percent.

 

 

Processing Years

Percentage Change

 

Industry Classification

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

1. Service Industry Sectors[35]

840,089

913,632

971,034

1,045,206

1,090,354

29.79%

2. Construction

322,702

355,350

385,328

411,324

436,535

35.27%

3. Retail Trade

325,090

342,665

362,761

384,347

399,625

22.93%

4. Real Estate and Rental & Leasing

 

319,048

 

334,426

 

352,210

 

374,264

 

394,836

 

23.75%

5. Health Care and Social Assistance

 

133,873

 

148,351

 

165,227

 

184,414

 

202,466

 

51.24%

Totals for Top 5 Industries

 

1,940,802

 

2,094,424

 

2,236,560

 

2,399,555

 

2,523,816

 

30.04%

Wholesale Trade

152,130

158,089

164,267

166,274

167,710

10.24%

Manufacturing

140,785

145,664

149,181

153,892

154,837

9.98%

Finance/Insurance

108,189

116,960

125,390

133,569

140,615

29.97%

Transportation and Warehousing

 

88,383

 

95,625

 

100,858

 

107,522

 

111,646

 

26.32%

Agriculture, Forestry, Fishing, and Hunting

 

66,441

 

69,967

 

72,683

 

75,916

 

77,639

 

16.85%

Arts, Entertainment, and Recreation

 

57,301

 

60,923

 

65,403

 

69,740

 

72,998

 

27.39%

Other Than a Type of Service

72,927

63,471

63,461

64,742

72,523

-0.55%

Information

49,908

52,848

55,021

56,974

59,251

18.72%

Mining

18,033

18,294

18,655

19,302

19,483

8.04%

Management of Companies and Enterprises

 

12,007

 

12,234

 

13,041

 

13,655

 

14,185

 

18.14%

Utilities

3,325

3,265

3,362

3,594

3,634

9.29%

Unknown

180,204

129,499

103,610

83,325

70,043

-61.13%

Totals

2,890,435

3,021,263

3,171,492

3,348,060

3,488,380

20.69%

Source:  TIGTA analysis of the S corporation BRTF for PYs 2000 - 2004.

 

Figure 10:  Ownership of Partnerships (PY 2004).  Ninety-three percent of all partnerships have 10 or fewer partners.  Fifty-three percent of partnerships have 2 partners, 17 percent have 3 partners, 23 percent have 4 to 10 partners, and 6 percent have 11 to 50 partners.  Partnerships with 51 or more partners represent only 1 percent of all partnerships.

Figure 10 was removed due to its size.  To see Figure 10, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 11:  Ownership of S Corporations (PY 2004).  Eighty-seven percent of S corporations have three or fewer shareholders.  Fifty-four percent of S corporations have 1 shareholder, 28 percent have 2 shareholders, and 5 percent have 3 shareholders.

Figure 11 was removed due to its size.  To see Figure 11, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

 

Figure 12:  Tiered Partnership[36] Filings by Asset Class.  Tiered partnerships grew 31 percent in PYs 2000 – 2004, while tiered partnerships with $10 million or more in assets grew 45 percent.

 

 

Processing Years

Percentage Change

 

Asset Class

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

Under $250,000

136,478

126,237

135,585

164,426

177,573

30.11%

$250,000 to under $1 million

71,268

70,165

75,158

82,085

86,002

20.67%

$1 million to under $5 million

88,039

90,729

98,916

108,813

115,369

31.04%

$5 million to under $10 million

24,576

26,044

29,434

32,732

34,595

40.77%

$10 million to under
$50 million

 

26,256

 

28,257

 

32,810

 

35,350

 

37,922

 

44.43%

$50 million to under
$100 million

 

4,355

 

4,621

 

5,641

 

5,683

 

6,138

 

40.94%

$100 million to under
$250 million

 

3,012

 

3,252

 

3,935

 

4,046

 

4,360

 

44.75%

$250 million and over

2,031

2,087

2,737

2,782

3,183

56.72%

Totals

356,015

351,392

384,216

435,917

465,142

30.65%

Source:  TIGTA analysis of the partnership BRTF for PYs 2000 - 2004.

Figure 13:  Top 5 Industry Classifications of Tiered Partnership Filings With Assets of $10 Million or More.  Tiered partnerships with assets over $10 million grew 45 percent in PYs 2000 - 2004.  Partnerships in the “Finance/Insurance” category grew 63 percent, while partnerships in the “Real Estate and Rental & Leasing” category grew 43 percent.

 

 

Processing Years

Percentage Change

 

Industry Classification

 

2000

 

2001

 

2002

 

2003

 

2004

PYs 2000 -

2004

1. Real Estate and Rental & Leasing

 

16,488

 

17,764

 

20,703

 

22,278

 

23,658

 

43.49%

2. Finance/Insurance

11,144

12,303

15,253

16,142

18,149

62.86%

3. Accommodation and Food Services

 

975

 

977

 

1,089

 

1,108

 

1,136

 

16.51%

4. Management of Companies and Enterprises

 

818

 

809

 

938

 

1,053

 

1,095

 

33.86%

5. Manufacturing

673

761

853

910

946

40.56%

Totals for Top 5  Industries

 

30,098

 

32,614

 

38,836

 

41,491

 

44,984

 

49.46%

All Other Industries

3,804

4,017

4,433

4,710

4,912

29.13%

Unknown

1,752

1,586

1,854

1,660

1,707

-2.57%

Totals

35,654

38,217

45,123

47,861

51,603

44.73%

Source:  TIGTA analysis of the partnership BRTF for PYs 2000 to 2004.

Figure 14:  Partnership Return Examinations by Asset Class.  Partnership return examinations increased 37 percent between FYs 2004 and 2005 with the largest increase, 66 percent, taking place in partnership returns with assets of $250,000 to under $1 million.

 

Fiscal Years

Percentage Change

 

Asset Class

 

2001

 

2002

 

2003

 

2004

 

2005

FYs 2001 -

2005

FYs 2004 -

2005

Under $250,000

1,217

1,536

2,490

2,199

3,544

191.21%

61%

$250,000 to under $1 million

592

734

938

622

1,035

74.83%

66%

$1 million to under $5 million

749

939

1,249

838

1,243

65.95%

48%

$5 million to under $10 million

248

370

626

356

469

89.11%

32%

$10 million to under
$50 million

 

405

 

597

 

1,027

 

982

 

935

 

130.86%

 

-5%

$50 million to under
$100 million

 

171

 

172

 

272

 

272

 

286

 

67.25%

 

5%

$100 million to under
$250 million

 

127

 

160

 

243

 

290

 

307

 

141.73%

 

6%

$250 million and over

154

240

283

348

409

165.58%

18%

Unknown

1,392

779

712

254

187

-86.54%

-26%

Totals

5,055

5,527

7,840

6,161

8,415

66.47%

37%

Source:  TIGTA analysis of the AIMS for partnership return examinations completed in FYs 2001 - 2005.

Figure 15:  S Corporation Return Examinations by Asset Class.  S corporation return examinations increased 63 percent between FYs 2004 and 2005 with the largest increase, 119 percent, taking place in returns with assets of $1 million to under $5 million.

 

Fiscal Years

Percentage Change

 

Asset Class

 

2001

 

2002

 

2003

 

2004

 

2005

FYs 2001 -

2005

FYs 2004 -

2005

Under $250,000

4,631

4,807

4,367

3,473

5,737

23.88%

65%

$250,000 to under $1 million

1,567

1,697

1,359

616

1,189

-24.12%

93%

$1 million to under $5 million

2,242

2,351

1,751

617

1,353

-39.65%

119%

$5 million to under $10 million

802

885

654

282

569

-29.05%

102%

$10 million to under
$50 million

 

1,122

 

942

 

963

 

795

 

1,063

 

-5.26%

 

34%

$50 million to under
$100 million

 

143

 

135

 

132

 

132

 

150

 

4.90%

 

14%

$100 million to under
$250 million

 

97

 

97

 

97

 

91

 

106

 

9.28%

 

16%

$250 million and over

30

34

39

58

42

40.00%

-28%

Unknown

1,818

695

333

336

201

-88.94%

-40%

Totals

12,452

11,643

9,695

6,400

10,410

-16.40%

63%

Source:  TIGTA analysis of the AIMS for S corporation return examinations completed in FYs 2001 - 2005.

Figure 16:  Top 5 Industry Classifications of Partnership Return Examinations.  Examination of partnership returns in the “Finance/Insurance” and the “Real Estate and Rental & Leasing” industry classifications increased 228 percent and 97 percent, respectively, in FYs 2001 - 2005.

 

Fiscal Years

Percentage Change

 

Industry Classification

 

2001

 

2002

 

2003

 

2004

 

2005

FYs 2001 -

2005

FYs 2004 -

2005

1. Finance/Insurance

566

756

1,111

1,084

1,856

227.92%

71.22%

2. Real Estate and Rental & Leasing

 

813

 

1,020

 

1,470

 

1,245

 

1,601

 

96.92%

 

28.59%

3. Agriculture, Forestry, Fishing, and Hunting

 

261

 

378

 

499

 

241

 

578

 

121.46%

 

139.83%

4. Professional, Scientific, and Technical Services

 

213

 

229

 

392

 

414

 

505

 

137.09%

 

21.98%

5. Retail Trade

158

259

420

351

493

212.03%

40.46%

Totals Top 5 Industries

 

2,011

 

2,642

 

3,892

 

3,335

 

5,033

 

150.27%

 

50.91%

All Other Industries

1,453

1,906

3,028

2,479

3,104

113.63%

25.21%

Unknown

1,591

979

920

347

278

-82.53%

-19.88%

Totals

5,055

5,527

7,840

6,161

8,415

66.47%

36.58%

Source:  TIGTA analysis of the AIMS for partnership return examinations completed in FYs 2001 - 2005.

Figure 17:  Top 5 Industry Classifications of S Corporation Return Examinations.  Examinations of S corporation returns in the “Retail Trade” industry increased 26 percent, while those in the “Construction” industry declined 25 percent between FYs 2004 and 2005.

 

Fiscal Years

Percentage Change

 

Industry Classification

 

2001

 

2002

 

2003

 

2004

 

2005

FYs 2001 -

2005

FYs 2004 -

2005

1. Retail Trade

1,057

1,153

1,027

751

1,332

26.02%

77.36%

2. Construction

1,554

1,572

1,333

600

1,160

-25.35%

93.33%

3. Finance/Insurance

423

528

377

376

960

126.95%

155.32%

4. Manufacturing

1,335

1,297

1,006

547

906

-32.13%

65.63%

5. Professional, Scientific, and Technical Services

 

829

 

908

 

832

 

713

 

895

 

7.96%

 

25.53%

Totals Top 5 Industries

 

5,198

 

5,458

 

4,575

 

2,987

 

5,253

 

1.06%

 

75.86%

All Other Industries

4,782

4,924

4,383

2,881

4,716

-1.38%