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IRA Financial Blog

Will the IRS Audit You in 2023? – Episode 372

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the updated numbers just released about IRS audit numbers for the 2022 fiscal year, and the likelihood you will get audited.

Will you get Audited by the IRS in 2023?

Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial. First of all, Happy New Year; hope everyone’s having a great new year and super excited about today’s podcast because new, updated 2022 numbers were released based off the study by Syracuse University by the Transactional Records Access Clearinghouse, or TRACK. And these results are based off internal IRS management reports, and there’s some really interesting data here in terms of IRS audit numbers for the fiscal year 2022. So, this is all the audits of the IRS – fiscal year 2022. It doesn’t mean, obviously, these are not 2022 returns. These are just the audits that are ongoing in the fiscal year 2022 that originated. Okay, so it could be obviously for past years, generally up to three-year statute of limitation. But these are some very interesting numbers.

So, let me just give a little bit of color to what I’m about to say. Obviously, the IRS is going to get some cash. We saw by recent legislation where they’re going to get close to $80 billion over the next several years. That’s not coming quick enough for the IRS. This is some shocking numbers. According to the IRS, because of budget cuts and increased needs, there’s only 1,400 IRS staff/revenue agents for 165,000,000 tax returns. There’s 1,400 staff year revenue agent time for 165,000,000 income tax returns. So, yeah, they do need more agents. I don’t know how many, I don’t know, $80 billion worth, but they probably could use some help.

Instead of face-to-face audits, studies show that they’re relying on highly automated processes, basically letter writing campaigns. I’ve talked about this before, scaring people to pay without having to actually send a person face-to-face to investigate and convince people to pay. And I’ve gotten some letters personally. I’ve seen them from clients; they are scary. They send you a letter and immediately saying, if you don’t pay the tax, your assets will be seized, your payroll, paycheck will be seized. They’re super scary, even if you’ve done nothing wrong. I’ve seen this for 1099s, I’ve seen this for what they thought were distributions that turned into just rollovers that weren’t reported properly.

So, the IRS is definitely getting more aggressive on their letter writing campaigns simply because they just don’t have enough people, all right? There’s 1,400 staff years of revenue agent time. It’s not a lot, okay.

So, let’s talk about some of the numbers. Clearly, millionaires are getting audited at a higher frequency than low incomes, but the numbers are still pretty shocking. So, let’s go through the actual numbers. So in all, 164,545,000 or so returns filed, there’s about 52,000 revenue agents. So, that number I talked to you about, that 1,400, that’s staff years of revenue agent time to apply. But there’s actually 56,000 agents, and there’s about 40,800 tax auditors, and there’s about 530,000 correspondence. So, they’re sending a lot of letters.

There’s total audits of 626,204. Your odds per 1,000 returns is 3.8, which is a 0.38%, okay, so quite the small number (that’s out of all tax returns). So, let’s go bracket by bracket. Lowest income wage earners, basically up to $25,000; there’s 23 million returns filed, about 3,000 agents on those files, about 5,700 auditors on those files. Your odds are getting audited per thousand, about 12.7 or 1.27%. So, if you’re making low income, they’re still auditing you at a higher rate than if you made $25,000-200,000, which is pretty interesting. A lot of this is earned income credit stuff where they’re just trying to scare people into paying tax if they’re abusing earned income credits.

Next bracket, if you go less than $200K. So like $25 to 200K, about 130,000,000 returns file. That’s the biggest bucket. About 32,000 revenue agents, but 30,000 auditers. So, this is the biggest bucket they’re focusing on. Interesting enough, $25,000 to $200,000. There’s 187,000 letters that are corresponding., And actually the, the bucket above this, the one from zero to $225 thousand, there’s almost 300,000 of letters, correspondences. That’s a lot, right? That’s telling you that they’re really pushing hard on people making very little money. These are income wage earners of less than $25,000. Now, maybe some of these are successful real estate developers. We’ve seen, without mentioning names, some real estate developers don’t pay a lot of tax. So that could be it as well, and we’ll get into some of those numbers, but you’re looking at a lot of correspondences, right? 289,000 versus 187,000 for $25,000 to $200,000. Total audits: 250,000. The odds for 1,000 returns is 1.9, which is 0.19%. So, these are the most returns and actually the lowest percentage of audit is if you make between $25,000 tp $200,000.

Now, this is based off 2022, so it could change in ’23, but generally there’s a lot of consistency in the way IRS audits. Yes, it could change when they get their funding, but the funding is not going to kick in for several years, definitely not for 2023. So, I think we can expect very similar numbers. That means if you make between $25,000 and $200,000, that’s the biggest percentage of accounts; it has the most revenue agents, the most tax auditors, but obviously the lowest percentage of audit because it’s so many returns.

But interesting enough, as I mentioned, low income people making less than $25K, they’re really active. The IRS is in terms of scaring them by mails because generally low income people aren’t as sophisticated as high income earners, there’s exceptions, clearly, but that’s generally a good argument to make. And they’re basically scaring people to pay, right? If you send a letter to someone who maybe doesn’t have a college education versus someone who makes $150 grand as an associate attorney, the person that doesn’t have the higher education may get scared and feel like they have to pay even if they’re not in the wrong when the IRS sends them a letter scaring the heck out of them versus someone that’s a little more educated.

So, the next bracket, this should be the biggest bracket, but it’s not in terms of audit, $200,000 to a million, there’s almost 6.9 million returns filed. There’s about 4,600 revenue agents, about 1,100 auditors in this group. It sends only about 28,000 letters, correspondence. Interesting, right? Maybe because they realize it’s not going to work; you can’t scare someone who’s more sophisticated into doing something. Total audits, very low, right? 33,000. Odds per thousand returns is getting audited 4.9, which is 0.49%. So under 0.5%, right? So, this is the second lowest audit rate. So, if you make between $200,000 and one million, you have the second lowest audit rate other than if you are between $25,000 and $200,000. But the only reason that’s a low audit rate is because there’s 130,000,000 returns being filed. Here, there’s only 6.8 million returns being filed, and it’s still less than 0.5%, 0.49%. So, clearly, if you’re in that sweet spot of $200,000 to a million dollars, they’re not sending you a lot of letters and there’s a very low audit rate.

Let’s move to the, sorry, the first bracket was $200,000 to 1 million, no Schedule C. So, if you’re just like a W-2, you’re a lawyer, make $500K. That is the numbers for that. There’s a separate category if you make between $200,000 and one million, and you have a Schedule C, meaning you have like some self-employment business, some K-1s flowing through to a Schedule C. In this case, there’s 2.5 million returns. You have about 5,400 agents. So, more agents than if you did not have a Schedule C, more auditors, even though there’s only 2.5 million returns being filed. And the previous category, where there’s $200,000 to one million and there’s 6.8 million returns, there’s only 4,500 agents or 1,100 auditors. And here there’s only 2.5 million returns being filed. There’s 5,400 agents, and 2,000 auditors. There’s only 19,000 letters. There’s 26,000 tax audits, that’s a larger number. So, clearly the trend here is if you have a Schedule C, there’s a bigger chance of getting audited than you don’t. Odds per 1,000 returns is 10.3, which is over 1%, okay? So, this is a pretty big number. If you have a Schedule C and make between $200,000 and a million, it’s about a 1% chance of getting audited. And they have a high percentage of revenue agents and auditors. Makes sense, right? They’re looking for small businesses, deductions, things like that.

And at the top category, you make over a million bucks. There’s 703,500 returns with 7,700 agents, only 987 auditors. So, that’s interesting. Very low correspondence, only 8,000. Total audit: 16,000. And this is a very high percentage, right? So, odds per 1,000 returns is 23.8, which is 2.38%. So it makes sense, if you make over a million bucks, you have a 2.38% chance in 2022 getting audited. Makes sense. Right? That’s where the most money is. The most chance to capture lost tax revenue is the people that make highest income. So, if you want to look at all these buckets, the highest bracket is over a million bucks. The second highest audit rate is people that make less than $25K, which is crazy, mind boggling. There’s only 23,000 returns filed, 23 million returns filed, excuse me. If you make less than $25,000 and it’s a 1.27% return, which is crazy, right? You would think that would be by far the lowest percent of return. But again, I think they are looking at certain taxpayers that show very low income but may have very sophisticated tax returns.

So, those numbers are super interesting. Most of the audits are correspondence audits, so out of the 626,000 audits, 93,595 were regular audits, where 532,000 were done by mail.

The odds of being audited in fiscal year 2022 fell to 0.38%. In 2021, it was 0.41%. So the numbers are going down. They obviously want to change that, and they feel with more money and higher budget they’ll be able to do that. $80 billion will help. And budget cuts are impacting their ability to do face-to-face audits, which I understand does make sense. Schedule C is definitely an area they’re looking at where if you are making between $200,000 and a million and have a Schedule C, you have a higher audit rate than if you don’t have a Schedule C, which I understand, because that’s what small businesses are using to file, and that’s where there is potential abuse with deductions and things like that.

Essentially, lowest income wage earners are being audited. If you look at 2020, it was 7.9%, in ’21, it was 13%, in ’22, it’s 12.7%. So, it has gone down from ’21, but it’s shot up from 2020. And again, I think a lot of this is just the earned income credits. There’s some abuse going on, but I still think that number is super excessive. But if you look at the percentages on, on those numbers, if you look at the audits, there’s less than 25 million. There’s 23.5 million returns filed, there’s 289,000 correspondence audits, and the total audits are 298,000, right? So very few face-to-face audits if you make less than $25K, which obviously makes sense, but still their letter writing campaigns are intense and they’re scaring the heck out of people to pay.

Where if you look at total audits, if you make $200,000 to one million with Schedule C is 26,000 and 19,000 of those are correspondences, meaning there’s 7,000 in person, whereas in less than $25K, there’s only about 9,000. Out of the 298,000 of audits, only 9,000 of those are in person. If you look at less than $200K total audits, 250,000, 187,000 are by mail, the rest are by in person. If you look at no Schedule C, 33,000 audits, 28,000 are by mail, and bigger percentages. 26,000 total audits, plus $200,000 to 1 million with a Schedule C and only 19,000 are by mail and the rest are in person. And the biggest percentage over a million, 16,766 total audits, 8,000 by mail, so half are in person, which I understand, right? They’re generally more sophisticated and there’s more money to capture, so that’s where you’re going to put more manpower, right?

It’s a simple money allocation, right? We’re going to put IRS agents, we’re going to spend time where we can capture the most money. Yeah, there’s a lot of money with low income folks who may be abusing certain areas of the tax code, but we’ll scare them by mail. We’re not going to send people; not enough chance of high returns, but someone who makes a million bucks or $200,000 to a million or a million plus, we’ll send the mail, but we’re also going to do a higher percentage of in-person because there’s a bigger chance to generate money back, which is the main game, right? They have a number in their head, for every dollar they spend, they collect like $0.25, so they know just more manpower, more money, more collections, right? Tax returns are complicated. We’re not saying that a lot of people that end up paying the IRS, whether it’s fines, penalties were essentially intentional or negligent, sometimes it’s just super complicated and the accountant screws up or the accountant doesn’t have all the information and that’s fine, right? It’s the IRS’s job to keep everyone in check, make sure we’re all paying our fair share of tax. Kind of the unfair part is really hitting low income folks super hard with very aggressive mail-writing campaigns.

And again, these letters, I’ve gotten them, you’ve probably gotten them. They scare the heck out of you, right? When you see like a big, bold black, we’re seizing your assets. We’re going to seize your paycheck if you don’t pay this, that forces you to do something quick. And even if you’re not in the wrong and you’re like, oh, I only owe $300, I better just pay it because I don’t want to mess with the IRS and having them seize my house or seizing my paycheck and embarrassing me with my employer, that’s what they do. Even though technically, you have a right to contest it, a lot of low income folks just aren’t doing it. High income folks are more inclined to say, you know what? I’m going to send this to my accountant or my lawyer and let them fight it out. I don’t care. This is BS. And the IRS realizes that, and that’s why they’re not sending as many correspondences to higher income folks, because they’re not as successful.

So, I hope you guys enjoyed today’s podcast. I wanted to kind of go through these numbers. The numbers just came out a couple of days ago by Syracuse University, that does a really good job tracking this. And this is all from, as I mentioned, internal IRS data. The IRS pushes back on this; they don’t like this. They’ve said in multiple public forums that the numbers aren’t accurate because they don’t like people breathing down their backs. Obviously, they need to keep their audit secret sauce secret because they don’t want people to know when they’re going to get audited, but these numbers to me are super helpful. No one wants to get audited, but the percentages are interesting. I’ll put a link in the comments so you can check this out as well. It’s from Syracuse University and all the numbers are here. I didn’t make them up.

Anyways, I appreciate you guys spending some time. Super interesting. Think anytime we can get some insight into the IRS and how they audit folks, it’s always interesting. So, thanks for listening. If you’re watching on YouTube, really appreciate it. Don’t forget to subscribe. Have an amazing day, amazing rest of your week, and I’ll see everyone again next week. Take care.

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