31-07-2025
Reflecting On IRS Cuts - Should You Still Be Compliant?
The IRS used to be a lot more formidable. I am certain of this from the experience of my career as an accountant which, is going on 50 years. depending on what parts you want to count. But you might say that the memories of old people are notoriously unreliable. That when they talk about either how great or how difficult it was in the past they tend to exaggerate. Not for nothing was I a history major. I understand that problem, so I will back up my claim with some history.
The Olden Days
I have a hard time accepting that 1985 is 40 years ago, but when you do the math, that is how it comes out. In 1985, I was approaching an inflection point in my career. I was promoted to manager some time around then, which really was not that big a deal at Joseph B. Cohan and Associates (JBC). I spent a good amount of time studying "Tax Reform For Fairness, Simplicity, And Economic Growth - The Treasury Department Report to the President" that was issued in 1984 and formed the basis for the Tax Reform Act of 1986, which is what made my career. During that period there were always a few audits of our clients going on.
And it was not because they were picking on us. Here are some numbers from "Highlights of 1985 - Commissioner and Chief Counsel Internal Revenue Service". At the end of 1985, the IRS had 96,705 employees. Of them, 24,433 were involved in "Examination" and 15,119 in "Collection". They collected $743 billion from a population of 239 million at a cost of $0.48 per $100 collected. Of 96,496,900 1984 individual returns, 1,265,592 were examined. That's 1.31%. The rate for individual returns with total positive income over $50,000 was 3.53%.
At the end of 2022, there were 84,553 IRS employees who collected $4.901 trillion at a cost of $0.29 per $100 collected from a population of 334 million. There were 161,666,477 individual returns of which 326,611 were examined. That is 0.2%. Returns from $500,000 to $1,000.000 were audited at a rate of 0.6%. Only for returns over $10,000.000 is the rate higher than the 1984 big dollar ($50,000) rate of 3.53%. This information is drawn from IRS Data Books.
For some today's dollars perspective the $50,000 big bucks in 1984 would be $158,723 now. Interestingly President Trump has proposed no income tax for people making less than $150,000. At any rate the thresholds don't line up that well, but I want to keep going. So let's compare the 0.2%/0.6% 2022 rates to the 1.31%/3.53 1984 rates. The latter would be somewhat reflective of my experience in 1985.
Using some elementary probability computations, we can determine that if the audit rate is at 0.6% (2022 big bucks, but not megabucks) in a forty-year career the chance that you will never face an audit is 79%. If you sign 100 tax returns as a preparer the chance that none of them will be audited is 54%. At the 0.2% rate your chance of no audits on 100 returns is 82% and the chance that you will never face an audit in a 40-year career is 92%.
The 1984 audit rates are a different story. At the big bucks rate of 3.53% your chance of never being audited in the course of a 40 year career would be 24%. The chance that none of a pile of 100 returns that you signed as prepare would be audited would be 3%. I believe that created a much stronger sense that audits were a real thing that might happen to you. Certainly that was the sense at JBC.
Current Events
Recent history is that there was a ramp up in IRS personnel. The IRS closed fiscal 2024 with 99,628 employees. Then there are the current events. The reductions in IRS numbers are an ongoing story, but in May they were down to 77,000 and expected to continue going down. Numbers had been going down and got to 74,000 in 2018 and 2019 before starting back up. It looks like they may be heading lower. Not material in numbers, but somewhat symbolic, 250 IRS agents have been detailed to immigration enforcement. This is reminiscent of Ted Cruz's idea of abolishing the IRS and sending them all to the border.
Regardless, it seems quite likely that audit coverage will not be going higher for 2025 and 2026 returns.
What Should You Do?
Treasury Circular 230 regulates people who practice before the IRS prohibiting written advice considering that a tax return might not be audited or that the particular matter would not be caught on an audit. American Institute of Certified Public Accounting (AICPA) standards of tax practice forbid practitioners from making recommendations that exploit the audit selection process of a taxing authority. The National Association of Enrolled Agents incorporates Circular 230 into its ethical guide.
So a lot of the people who are competent in advising you on the tax law are supposed to ignore the high improbability of audit in giving you advice. I tried interviewing a couple to see if I could shake them loose. That will be the subject of my next post, but since I don't practice anymore and quit the AICPA because I thought the dues were not a good value, I can give you some advice if you want to exploit the low audit probability in the coming years, besides the advice to not do it because it is wrong.
The first piece of advice is to remember that most likely this too shall pass. So avoid doing anything that will either extend or never start the statute of limitations. That would include not filing at all or large omissions of gross income and outright fraud. Whatever scheme you come up with and you really should come up with your own, don't tell anybody about it. Don't pay somebody a lot of money for tax schemes that the boring stick in the mud professionals tell you don't work. When the IRS comes up for air those may be the first things that they go after. You will be on a list that the promoter kept and the money you paid the promoter will be gone along with all the interest and penalties.
If you owe the IRS a lot of money for past taxes, more than you can realistically pay, there is probably no point in being proactive in reaching out to them. When you do get notices pay close attention and when told that you have a right to a collection due process hearing send in the appropriate form. Provide the request information within the deadline. When they don't get back to you for long periods that is a good thing. There is a ten year statute of limitations on collections that runs against the IRS. The people who regularly call you about special programs to work out your IRS debt are almost certainly running scams. If you can't handle whatever monthly payment the CDP hearing results in, appeal.
Conclusion
I recommend that you stay compliant because it is the right thing to do, but there are some practical considerations. The chance of criminal prosecution for willful violation of the tax laws still exists, even if it is vanishingly rare for people who are not breaking other laws, and not bragging about it, or telling other people to do it. It does seem that in the current environment we may have administrations where enthusiasm for enforcing immigration laws alternates with enthusiasm for enforcing the tax laws. If I were engaging in tax shenanigan's my nightmare would be thousands of masked ICE agents being transferred to the IRS Criminal Investigation Division.
