So much has been made about the alleged 87,000 new IRS agents and how they will be auditing you and your business, but is this really the case? Let me take you through the issues surrounding the IRS and why the chances of being audited by these new agents is not very likely.
WHY 87,000 AGENTS?
That number was derived from the Treasury Department assessing how the IRS could use an $80 billion appropriation. The report stated that with the allotted appropriation, the IRS could add 87,000 new staff to “rebuild” and “revitalize” the agency. So, in reality, the number of new agents was merely a function of the amount requested for appropriation.
STATE OF AFFAIRS AT THE IRS
The IRS has been dealing with a backlog going back to the Obama Administration, where many IRS agents were removed from their normal audit duties and replaced by implementing the ACA, otherwise known as Obamacare. Since those days, the IRS has been understaffed and overworked. Compliance audit percentages decreased and coupled with an antiquated computer system, the IRS has simply not had the resources to do their job properly—thus the recent request to fund the department. Since 2010, the IRS workforce has decreased by 17% and it’s an aging workforce too. The IRS estimates it will lose close to 80,000 agents due to retirement over the next five years.
The situation has only worsened with the pandemic. Not only did the IRS lose valuable months to process returns, the number of paper returns more than tripled since 2020.
THE IRS PROCESSING QUANDARY:
Think for a minute about the following scenario—you are a business owner in an S-Corporation with 4 other shareholders. You discover your company is eligible for the Employee Retention Credit for 3 quarters of 2020 and 3 quarters in 2021. You file six amended payroll tax returns (paper filed). Additionally, you are required to amend your 2020 and 2021 corporate tax returns (both returns must be paper filed). Because you are an S-Corporation, each individual shareholder must file an amended 2020 and 2021 1040 tax return (assuming these were paper filed as well). This scenario has created 18 paper filed returns that the IRS must not only collate in chronological order but also process—requiring agent(s) to manually find these returns from a stack of a million other returns and manually process them. Think of the time and energy spent and now multiply this by over a million other scenarios just like this one and you can start to grasp the breadth of the backlog.
The above scenario illustrates why, if you’ve tried to call the IRS for, let’s say, the status of a payment you made or a return you have filed, then you have received a response akin to: “I’m sorry we cannot help you in this matter—you will receive a notice once we get to your file”. Or maybe you were inquiring as to where your ERC refund is and read in the newspaper or saw on the evening news that the IRS is backlogged in issuing ERC refunds anywhere from 2-9 months.
SOME SOBERING STATISTICS:
As of October 21, 2022 the IRS had about three million individual returns and north of four million business returns awaiting initial processing, as well as about two million amended individual and business returns. In total, it has over 6.3 million returns in suspense, with about two million in unpostable status, 1.1 million processing rejects, a half-million in error resolution, and nearly three million still waiting to be worked for potential identity theft. Most math errors involved reconciliation of the Recovery Rebate Credit or the Child Tax Credit, and through October 10, the IRS had sent nearly 14 million notices mostly concerning those issues.
AND SOME FINAL THOUGHTS:
Assuming the IRS can find and hire 87,000 new agents by year end, they still need to be trained and most likely, will be used to process and reduce the number of unposted tax returns. So I don’t see them being in a position to begin accelerating the audit process until a few years from now, at the latest.
Between 2010 and 2019, audit rates for individuals dropped from 0.9% to 0.25%, according to a report from the Government Accountability Office. Those rates vary by income level, with those making less than $25,000 and those with incomes above $200,000 receiving higher-than-average scrutiny in recent years. The new efforts to close the tax gap are unlikely to focus on mom-and-pop taxpayers, experts say.
“The absolute number of audits will go up, but the share of people being audited will likely be the same for households earning less than $400,000 per year,”
“The absolute number of audits will go up, but the share of people being audited will likely be the same for households earning less than $400,000 per year,” says Glenn Borst, senior legal analyst at Wolters Kluwer Legal and Regulatory U.S. The bulk of new audit activities will be directed at high-net-worth individuals, large corporations and complex partnerships, he adds.