The Internal Revenue Service is hiring 87,000 new agents, but taxpayers will not feel the pain for another two to three years. That’s how long it will take the agency to hire and train agents. Few have discussed the extent of this pain. Still, it’s something to think about when you consider the majority of coming audits will be conducted by new agents, many of whom will have been hastily hired and operating with minimal supervision.
Playing the audit lottery will not be smart in future tax years. Taxpayers should protect themselves now, especially when profiting from statutory gray areas — such as cryptocurrency staking, investing through decentralized autonomous organizations (DAOs) and other
Despite all these challenges, the IRS is already signaling that they intend to start doing substantial business audits in future years. It has been years since the Coinbase John Doe summons, and the IRS still has not done the expected bulk audits, so with staffing increases, these will probably start increasing.
Since the pandemic, transfer pricing audits have ground to a halt but will surely pick up again soon — and I expect many crypto businesses to be the target of these audits as well, especially those in DeFi with cross-border lending transactions. And then for R&D, the IRS has issued two memos in the last year requiring full due diligence and documentation to be done before preparing the tax return, but the R&D credit mills predatorily targeting startups have yet to change their business practices, so I expect to see audits of R&D credits en masse once enough agents are ready.
Most of the tax accountants I worked with early in my career have long since retired. The new generation of so-called “experts” didn’t get this business audit experience in their early careers and are utterly unprepared for what is on the horizon at the IRS. Because of this, there is a lot of incorrect information floating around in the tax world. Many advisors who have been playing the audit lottery for years successfully are in line to get both themselves and their clients burned in the coming audit storm.
When should taxpayers be afraid? Considering the two- to three-year timeline to get staffed and the three-year statute of limitations for auditing most tax returns, the tax years that will be most at risk for audit are 2021 and onwards. Per 2019 IRS statistics, individuals with taxable income between $25,000 and $500,000 only have a roughly 0.2% chance of being audited each year, with those reporting $0 income or a net loss for the year at 1.1%.
Back in 2010, mid-range incomes were only at a 0.7% risk. If $0 or less of income was reported, there was a 20.6% chance of an audit — meaning those playing it conservatively will likely still be OK. However, those taking aggressive positions were at far greater risk, likely running that 1-in-5 risk of audit.
Because of this, I recommend choosing your advisors carefully. Aggressive tax positions should be avoided right now unless the benefit outweighs the risk regarding the cost of litigation. The biggest fallacies I hear in consult calls every week tend to come from Reddit threads, and trust me, Reddit is not a credible source. Be sure to look up your advisors and make sure they are licensed and experienced, as this, at least, will give some grounds to have penalties waived if an aggressive tax position is questioned.
Crystal Stranger is a federally-licensed tax EA and the international tax director at GBS Tax. She worked previously as a software developer in San Francisco.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.