You've seen the scary headlines, first when the aspirationally-named Inflation Reduction Act (IRA) passed in 2022 and again over the past few days after the IRS released its Strategic Operating Plan update. The IRS received an additional $79.4 billion in funding from the IRA (though the Fiscal Responsibility Act of 2023 and the Further Consolidated Appropriations Act of 2024 subsequently rescinded $21.6 billion) and "its number of audits is about to surge."  So, should you expect to get audited this year?  The short answer is... probably not.

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Who WILL face a higher audit risk?

• Large corporations with assets of more than $250 million - the IRS expects to audit 22.6% of these companies in 2026 compared to 8.8% in 2019.
• Large partnerships with assets of more than $10 million - the headlines read "audit rates to increase ten-fold," but that's to 1.0% in 2026 from 0.1% in 2019.
• Individuals with more than $10 million of income - to 16.5% in 2026 from 11.0% in 2019.
• Finally, and perhaps not technically an "audit," the IRS recently sent compliance letters to 125,000 audacious earners of $400,000 or more (including 25,000 earning more than $1 million!) who haven't filed a tax return since 2017.

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What's the good news?

There is plenty of good news in the update. Even if one of the first three bullet points above applies to you, it's not as bad as it sounds. One of the most common statistical errors I see in the media is to ignore base rates. As noted above, if you have a large partnership, your audit rate can increase ten-fold and yet there's a 99% chance your entity will NOT get audited in 2026. The audit rates in 2019 were at or near historic lows, so some increase in audit rates does not necessarily translate into a draconian tax regime. In fact, the audit rates for all three categories were higher in 2010, at 28.5%, 3.8%, and 21.5%, respectively.

For those earning less than $400,000 annually, the news is even better. Per the update, "The IRS will not increase audit rates relative to historical levels for small businesses and households making under $400,000 per year."  At first, I was skeptical about this one. The term "historical levels" would seem to leave a lot of wiggle room – which "historical level" we're talking about matters, as noted above. However, IRS Commissioner Danny Werfel clarified in a recent Senate Finance Committee hearing that the level was that of 2018, which was very low (around 0.3%) due to IRS budget cutbacks and the COVID-19 pandemic (audits occur in the three years following the tax year).

The best news of all may have nothing to do with audits. According to the U.S. Treasury Inspector General for Tax Administration's April report, through December 31, 2023, the IRS has spent more on each of Operations Support ($1.8 billion) Taxpayer Services ($1.1 billion), and Business Systems Modernization ($1.0 billion) than it has on Enforcement ($426 million). For those who have found themselves on hold for hours or engaged in a months-long snail mail back-and-forth with the IRS trying to resolve a simple misunderstanding, this should be welcome news. The IRS is investing in online service enhancements (one stated vision for the future is "All taxpayers can meet all of their responsibilities, including all interactions with the IRS, in a completely digital manner if they prefer."), simplified tax notices, paperless processing, and call center modernization. It remains to be seen how well these investments pay off in terms of customer experience, but for a $57.8 billion price tag, taxpayers expect and deserve a more helpful and responsive IRS.

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What are the takeaways?

• Continue paying as little tax as necessary. Remember, the IRS only enforces tax policy; Congress sets it. As long as the tax laws say you're entitled to that deduction or credit, an increased risk of an IRS audit should not be a reason not to claim it. If you feel like Congress got it wrong and you should pay more taxes, make a donation to the US Treasury, but most people choose to direct their excess funds to retirement savings, their families, or their favorite charities.
• Keep and retain good records. In the digital age, it's easier than ever to capture and store appropriate documentation supporting your tax returns, no shoeboxes required. You should retain records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. If you DO get selected for an audit, having good records will greatly reduce your stress, and your potential tax liability.
• Consult a professional (particularly if you're one of the high earners that haven't filed a tax return in five years!). The IRS can be surprisingly cooperative with deficient or non-compliant taxpayers who come forward, and payment plans are often an option, but definitely consult with a CPA or tax attorney first.

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If you need a referral to a tax professional, or if you want help putting together a tax efficient financial plan, GatePass can help. Please schedule a call with a member of our team.

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