In 2022, for every 1,000 income tax returns filed, the IRS audited 3.8. That number was only 2.5 out of every 1,000 back in 2019.
Audit rates had been in decline since 2010. This was primarily due to funding difficulties at the Service.
There had been a hiring moratorium in place. Retiring staff wasn’t replaced. This led to many of the service issues we’ve seen in processing returns and getting someone to answer the 800 numbers in the past couple of years.
But it’s obvious that the $80B funding increase pushed by the new administration and further funded by a bi-partisan, lame duck congress last year had its intended effect. Audit percentages are again increasing.
This increase has been spread across all income categories. But one of the oddities in looking at the numbers is that you have a better chance of being audited at either end of the income spectrum.
The wealthiest Americans earning above $5M annually were audited 2% of the time last year. This makes perfect sense. If you were working at the Service and wanted to audit someone, why not pick a case where you can actually collect?
Contrast that to the poorest Americans, earning less than $20K annually, who were audited five and a half times more often than middle-class Americans. Taxpayers have less of a chance of being audited if they earn $400K annually vs. $20K.
Why? The Earned Income Tax Credit. If you claimed the credit and the Service can prove that you earned money that wasn’t claimed on your return, they’ll probably audit.
And they should. Again, this is perfectly logical.
Let me leave you with this.
There are two points that need to be made.
First, the Service doesn’t audit anyone without a reason.
They don’t have the trained labor necessary to do random audits anymore. If you’re being audited, it’s because they believe they have taxes to collect.
If you’re in the middle of an examination and ask the auditor why you were chosen, don’t believe the auditor’s response. They’ll probably tell you that it’s random, because that’s what they were told to say.
Understand that before an audit letter goes out, there are a couple of layers of auditors and managers that have to approve the audit. They’re only going to send out a letter and commit time and labor to an examination if they expect to be more than compensated for their time. They don’t audit anyone without a reason.
Second, the number of audits we’ll see in the coming years is going to increase.
70% of the IRS budget goes to personnel. The $80B increase will again bolster their workforce. And the majority of those new people will go into audit enforcement.
Will those new audits only be focused on taxpayers earning more than $400K annually? That’s what the administration promised, but by definition this is impossible because auditors must be trained.
They start auditing lower-end returns. If successful, they go further up the ladder until they get to the upper-end returns. That’s only if they ever get to the higher-end returns in the first place. Many new auditors are so untalented that they never progress past the lower or middle-income brackets.
But if you’ve properly completed your returns, you have no reason to worry. Again, they’ll only commit time and labor to an endeavor where they’ve discovered a problem and presume to be compensated.
It’s more important than ever to get your books and records handled properly. I haven’t had one of my returns audited at the Federal Level in the past twelve years. Why? Because we take the time and do the work correctly.
If you or anyone you know needs our help, we’d love to talk.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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