As a CPA, one of the biggest worries I hear from people is having their tax return audited. One of the consistent comments I get is “I don’t want to go to jail!” While that is said in jest, people do have a deep-seated fear of the IRS and the power they have. They are afraid that the IRS will show up on their doorstep one day. However, most audits are routine computer generated “correspondence audits”, which means the IRS tries to handle the audit through computer identified discrepancies or questions that generate notice mailings to taxpayers. These are usually easily handled by the taxpayer with the assistance of their CPA.
With the passing of the “Inflation Reduction Act,” the fears within many are being stirred. The new act has allocated $80 billion to the IRS over the next decade. About $45 Billion of that is ear marked for enhanced IRS enforcement. That means the IRS is planning on hiring an additional 87,000 employees, which would double its current size. With natural attrition like agent retirements, it may take a while to meet those hiring goals, but hiring new employees at the IRS is not by itself a bad thing. Over the past several years, their service has fallen off significantly. It is not unusual for me to spend 3+ hours on every communication I try to have with them, and that’s if they will even take my phone call and let me wait that long. So I’m excited for them to add some staff to assist with taxpayer issues, but I will be concerned if the enforcement ratchets up to a level that is unnecessary.
The IRS’s strategic plan states that “The IRS is increasing focus on non-compliant, high-income and high-wealth taxpayers, business partnerships and large corporations that make up a disproportionate share of unpaid taxes.” However, the government estimates people with less than $75,000 in income will see more than 710,000 more annual audits. That’s 60% of the projected 1.2 million increase in audits. I don’t think that’s the section of the population most people feel should be following under the scrutiny of additional audits. Even with these new hires over the next decade, the IRS is going to struggle to catch-up with all the work that is backlogged, so I expect most of the additional audits to continue to be correspondence audits and not an agent at your door.
Ultimately, most audits are simple discrepancies that can be handled with some limited correspondence with the IRS. However, that simplicity is based on the underlying accuracy of the returns in question. Therefore, I recommend that you work closely with a trusted tax professional to ensure that you’ve done all you can do within the law to limit your tax liability.