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Federal Income Tax Update

Keith, a white man with brown hair, wears wire-rimmed glasses, a white shirt and black jacket.
Keith A. Wood

I. IRS Audit Statistics

The 2025 Internal Revenue Service Data Book contains audit statistics for years 2015 through 2023, as of the fiscal year ended September 30, 2025 (FY 2025). For tax years 2021 and earlier, the statute of limitations generally expired by September 30, 2025. However, for 2022 and later returns, the statute of limitations has yet to expire. There will be additional audits of returns for these years.

For 2015 through 2023, individual audit rates dropped significantly. Individual tax returns had an audit rate of 0.6% for 2015 returns versus 0.1% for 2023 returns. For individuals with income between $1 million and $5 million, the audit rate dropped from 2.6% for 2015 returns and 1.9% for 2022 returns to 0.2% for 2024 returns.

The audit rate for C corporations dropped from 1.0% for 2015 returns to 0.1% for 2023 returns.  For partnerships and S corporations, the audit rate for 2015 returns was 0.2%, compared to less than .05% for 2023 returns.

In FY 2025, 19% of audits were field audits, down from 22% last year. The others (81%) were correspondence audits.

Below are the FY 2025 audit statistics for 2023 tax returns:

A. Audit Rates for Individual Tax Returns

During FY 2025, only 0.1% of individual income tax returns filed for 2023 were audited (down from 3% for 2022 returns).

Total 2023 Individual Returns Audited in FY 2025: 0.1%

  1. No positive income              3%
  2. $100,000 to $200,000         .05%
  3. $500,000 to $1 million        1%
  4. $1 million to $5 million      2%
  5. $5 million to $10 million    0%
  6. $10 million or more             2%

B. Audit Rates for Partnerships and S Corporations

For partnership and S corporations, the FY 2025 audit rate for 2023 returns was less than .05%.

C. Audit Rates for C Corporations

C corporation returns filed for 2023 had an audit rate of 0.1% during FY 2025 (down from 0.2% for 2022 returns).

Total 2022 C Corporation Returns Audited in Fiscal Year 2024:   0.1%

  1.  Assets $1 million to $5 million               0.1%
  2.  Assets $5 million to $10 million             0.1%
  3.  Assets $10 million to $50 million          0.6%

D. Offers in Compromise and Criminal Case Referrals.

1. Offers in Compromise. For FY 2025, the IRS received 38,797 offers in compromise but accepted only 5,464.

2. Criminal Case Referrals. The IRS initiated 2,792 criminal investigations for FY 2025 and completed 2,850 cases (up from 2,481 last year). The IRS referred 2,043 cases for criminal prosecution (588 for legal source tax crimes, 949 for illegal source financial crimes, and 506 for narcotics–related financial crimes) and obtained 1,611 convictions. For convictions, 1,225 were incarcerated.

II. Fifth Circuit Withdraws its Self-Employment Tax Decision in Sirius Solutions; B.K. Alain, LLP v. Commissioner, 2026 WL 2333930.

In a surprising reversal of its earlier January 2026 ruling in Sirius Solutions, the Fifth Circuit withdrew its earlier opinion and issued a substitute opinion in K. Alian. The opinion more narrowly defines a limited partner as “a partner who plays no significant role in managing or running a business.” The Fifth Circuit now seems focused on the distinction between limited partners who are actively involved in managing the business versus limited partners who participate in only the non-managerial aspects of the business.

III. Equitable Relief May Excuse Missing the 90-Day Deadline for Challenging a Final Partnership Adjustment; Big Apple Tompkins Realty, LLC, 167 T.C. No. 7 (2026).

The Tax Court ruled the 90-day deadline for filing a Tax Court petition to challenge a final partnership adjustment is a claims processing rule rather than a jurisdictional requirement. The court rejected the IRS’ motion to dismiss a petition filed 452 days late. The court ruled the taxpayer may be excused for its late filing upon a showing that it is entitled to equitable relief.

IV. Eighth Circuit Rules 90-Day Deadline to File Tax Court Petition is not Jurisdictional; Maniktala v. Commissioner, 2026 WL 2320396.

The Eight Circuit Court has joined the Second, Third and Sixth Circuits in holding the Section 6213(a) 90-day deadline for filing a Tax Court petition is not an automatic bar to challenging a tax assessment. The taxpayers did not receive the statutory notice of deficiency until after the 90-day deadline had passed. They ultimately filed their petition four months late. Nevertheless, the court ruled the taxpayers may be entitled to equitable tolling.

V. No Equitable Tolling for Late-Filed Tax Court Petition Where No Extraordinary Circumstances:_Boechler, P.C. v. Commissioner, 2026 WL 2293279.

In 2022, the Boechler, P.C. law firm (“BPC”) successfully argued the 30-day deadline to file a Tax Court petition for review of a collection due process determination is procedural and not jurisdictional. Boechler, P.C. v. Commissioner, 596 U.S.199 (2022). The case paved the way for taxpayers to argue various 90-day statutory deadlines should be equitably tolled where the taxpayer, who otherwise diligently pursued its rights, was prevented from meeting the deadline due to extraordinary circumstances.

After its victory before the Supreme Court, BPC argued its sole attorney-owner faced extraordinary circumstances in being a single mother, caretaker for an ailing family member and sole practitioner of her law firm. The Eighth Circuit, however, found such circumstances were not entirely beyond BCP’s control and did not prevent her from meeting the filing deadline. Although Ms. Boechler hired an outside attorney to file the petition, she miscalculated the filing deadline and did not demonstrate diligence in protecting her rights, such as consulting her staff or an outside attorney to confirm the deadline. Accordingly, her neglect did not warrant tolling.

VI. No Deduction for Attorney’s Fees Yields $65,000 of Taxable Income on a $5,000 Settlement; Eiler, 167 TC No. 3 (2026).

The Eilers negotiated a $65,000 settlement against credit reporting agencies that allegedly issued inaccurate credit information about the Eilers to third parties. However, the Eilers pocketed only $5,000 after attorney’s fees and other expenses were paid out of the settlement. The Eilers received a Form 1099 for the full $65,000 but reported only $5,000 as taxable income.

The Tax Court concluded none of the attorney’s fees or other expenses were allowed to offset the $65,000 settlement. Under the Supreme Court’s decision in Banks, 543 US 426 (2005), any portion of a settlement paid to attorneys as a contingency fee is fully includable in gross income.  Section 62(a)(20) allows an above-the-line deduction only for attorney’s fees incurred in civil claims for unlawful discrimination, which does not include violations of the Fair Credit Reporting Act.

Keith Wood is an attorney with Carruthers & Roth, P.A. in Greensboro.