IRS Audits May Increase in 2021 and Beyond

With the Biden administration preparing for a significant increase in public spending, Republicans and Democrats are split over how to raise the necessary funds. As a result, President Biden himself has come up with a proposal. Rather than increasing taxes for corporations (which Republicans oppose) or increasing taxes for relatively low-earning taxpayers (which Democrats oppose), President Biden is suggesting that the IRS enhance its efforts to collect the funds that taxpayers already owe. This, Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, should be cause for concern in 2021 and beyond.

The IRS “has experienced significant attrition in examination resources since 2010.” While the IRS employed more than 11,000 revenue agents, compliance officers, and tax examiners a decade ago, as of 2019, this number stands at just 8,000. This attrition has resulted in a corresponding drop in the number of audits conducted each year.

According to the Associated Press, previous estimates have placed total federal budgetary losses due to nonpayment of taxes at around $440 billion per year. However, IRS Commissioner Charles Rettig recently stated that the annual “tax gap” could be as high as $1 trillion. By equipping the IRS with the resources it needs to audit taxpayers at higher rates, the Biden administration estimates that working to close the tax gap could raise approximately $700 billion over 10 years.

Will the IRS Audit Your (or Your Company’s) 2021 Tax Returns?

So, what does all of this mean for you? If the proposal moves forward, more U.S. taxpayers can expect to be audited. Based on the IRS’ current enforcement priorities, those who may be at greatest risk include gig economy workers, cryptocurrency investors, small businesses, and high-income taxpayers that report relatively low taxable income. However, the IRS will not be focusing on taxpayers in these groups exclusively, and it will be continuing its current strategy of relying on red flags to determine when taxpayers may have underreported or underpaid their tax liability.

Currently, the IRS audits less than one out of every 200 federal income tax returns. Efforts to employ more revenue agents, compliance officers, and tax examiners are unlikely to change this ratio significantly. However, even today, the IRS audits hundreds of thousands of returns every year, so even a slight “improvement” in the ratio could mean a substantial number of additional audits.

What Should You Do if the IRS Audits Your Income Tax Returns?

If the IRS audits your (or your company’s) income tax returns, what should you do? There are several steps you need to take when your (or your company’s) returns are being audited by the IRS. Most importantly, you need to engage experienced tax defense counsel, and the best thing you can do is consult with an experienced Boston tax attorney right away.

Request a Confidential Consultation with a Boston Tax Attorney

If you need legal representation for an IRS audit, we encourage you to contact us promptly. To schedule a confidential consultation with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989, email ket@thornlawgroup.com or contact us online today.