IRS Adds Thousands of New Auditors, Gearing Up for Increase in Tax Enforcement Actions
In recent news, the IRS is adding approximately 2,500 new auditors to its roster in anticipation of Congress passing a $40 billion package designed to increase tax enforcement on the wealthy. According to a recent news report, roughly 2,000 agents will be added to the Small Business team and another 500 to the Criminal Enforcement team. IRS officials explain that part of the recent hiring boom is due to the fact that the agency lost nearly 17,000 auditors over the past decade.
The soon-to-be increase in the total number of IRS auditors is an indication that the Biden administration and democrat lawmakers are serious about tax reform on those who make a significant income. The intent appears to be to reduce the “tax gap,” which is the difference between what the IRS believes it should be bringing in versus what it actually receives. In fact, earlier this year, President Biden proposed hiring as many as 5,000 new IRS auditors in hopes of raising an additional $700 billion in tax revenue.
What More IRS Auditors Means for Taxpayers
With the IRS hiring more than 2,500 new auditors, the agency will now have the manpower to review and audit many more returns per year. In the past, the IRS only audited a small fraction of returns. Historically, individual tax returns have been audited by the IRS at a rate of about .6 percent, while businesses see a higher rate of audits, nearing 1%. However, with more auditors, the IRS is in a position to audit a much greater number of returns. Thus, those who may have been able to stay under the radar in recent years may no longer be able to do so.
How Does the IRS Determine Which Returns to Audit?
It’s a bit of a black box when it comes to how the IRS decides which returns to audit. According to the IRS, the agency uses two methods when reviewing which returns to audit. One is a statistical formula that compares a return to similar returns, looking for red flags. The other is by auditing returns that are related to a return the IRS has already decided to audit. For example, if your business partner is selected for an audit, it may increase the chances that the IRS selects your return for an audit, as well.
According to the IRS, being selected for an audit does not always mean there is a problem. However, more often than not, the fact that a return is being audited means that the IRS flagged some inconsistency or irregularity with the return. For example, the following can all lead to an audit:
- A significant home office deduction; and
- Claiming too many or too much in charitable donations;
- Deducting too many business expenses;
- Failing to report income;
- The presence of mathematical errors;
- Using only round numbers when filing a return.
This is just a partial list of the potential reasons for an audit. The IRS can select a return for audit at its discretion. Depending on the nature of the errors or inconsistencies in a return, the IRS can conduct several different types of audits.
A correspondence audit is the lowest level of audit. These audits typically involve the IRS sending a taxpayer a letter requesting additional documentation. If handled properly, a correspondence audit may be easily resolved. However, if the IRS is not satisfied with a taxpayer’s response, it may escalate the audit to an office or field audit.
An office audit takes place at the local IRS office. These audits typically result from relatively minor issues with a return. The IRS agent overseeing the audit will request that you physically come into the office and bring all requested documentation. The IRS agent will expect you to be able to explain any discrepancies in the return. Thus, preparing for an office audit is imperative.
The most invasive type of audit is a field audit. This is where an IRS auditor comes to your home or place of business. The IRS generally reserves field audits for when there are significant issues with a taxpayer’s return. In some cases, your attorney may be able to convince the IRS auditor to conduct a field audit at their office, which can reduce the stress and anxiety of the process.
Are You Being Audited by the IRS?
If you recently received notification that you are subject to an IRS audit, or you fear that an audit may be in your very near future, reach out to Oberheiden, P.C. At Oberheiden, P.C., our dedicated team of tax lawyers represents clients nationwide in all types of tax enforcement actions. We routinely consult with clients who are being audited by the IRS, helping them understand the nature of the agency’s concern and how to prepare an effective response. To learn more about how we can help you navigate the tax audit process, give us Oberheiden, P.C. a call at 1-888-680-1745. You can also connect with us through our online form and one of our attorneys will reach out to you.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.