Author: Kelly Coughlin, CPA, EveryDayCPA, Inc.; Founder, TaxRxCenter

There has been a lot of noise on audits in the media lately. It’s time now to talk about how to deal with them. The IRS calls audits examinations…I guess that is kinder gentler term. Examinations reminds me of either taking the CPA exam or a physical exam. Both have some things in common with an IRS examination…I will let you guys figure out what I am talking about there. In terms of the analysis of IRS AUDIT activity, you need to be careful of this numbers. While some who want to understate the level of audit activity by stating in 2021, there were about 750k examinations. There has been a lot of chatter about targeting taxpayers with income UNDER $50k. Well, this is kind of misleading. Over 90% of those audits were MAIL audits. This means they were probably looking at things like child tax credits, earned income credits, and all the messy stuff including the big-time fraud that goes with them. I don’t need to point out that ANY government program including tax programs that can possibly get free money in the hands of people are ALWAYS targets for massive fraud. And the IRS pretty much has a minimum duty to do that. Preventing bad actors from stealing taxpayer funds is probably number one on my list of IRS priorities. 

It’s important to note that nearly 50% of the taxpayers under $50k in income that are audited again, mainly by the mail, simply don’t respond to the audit notices. They pretty much ignore it. Most likely because it’s fraud or they simply don’t have anything to lose if they kind of just give the middle finger to the IRS. The IRS sends correspondence saying, hey what’s up with this tax credit claim…can you prove to us that you now have five kids that live with you and you support but last year you had zero?. If they ignore the letter, chances are it is not a legitimate claim on the tax return. If it’s a letter asking for tax and they ignore it, chances are the taxpayers has nothing to lose… no assets to seize, no wages to garnish, and certainly no home to place a tax lien on. Of course, I am not saying EVERYONE in the under $50k category that ignores the IRS has nothing to lose or is committing fraud. But if you have nothing to lose, the IRS mantra of “We have what it takes to take what is yours.” Is kind of meaningless. 

So, to say that the IRS is pounding on the doors of low income taxpayers, extracting taxes from them I think is very misleading. They are simply following up with electronic correspondence because there is a mismatch among one or many elements in a tax return, and looking for a taxpayer to explain the mismatch or support their claim in the tax return. On other hand, those with income over $50k and under $10 million, the no response rate is less than 25%... they have something to lose if they ignore the IRS; so 75% say, thank you very much, how can I get you off my back. And then those with over $10 million in income, their no response rate is less than 10%. This group plays hard ball with the IRS, they. They arm up with their CPAs and tax lawyers and deal with it head on. So, 90% of these taxpayers, thank you very much. Contact my CPA. And don’t send me any more letters.

So, should we welcome this this expanded army of IRS auditors? Hell no! Should we fear them? Heck no. Should we sharpen our game to make sure we can outrun the other guy who cannot outrun the IRS bear? Yes.