The Internal Revenue Service is hiring 87,000 new agents, but taxpayers won’t 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 that the majority of upcoming audits will be performed by new agents, many of whom are hastily hired and operate with minimal oversight.
Playing the audit lottery won’t be smart in the coming tax years. Taxpayers now need to protect themselves, especially when taking advantage of legal gray areas – such as staking cryptocurrency, investing through decentralized autonomous organizations (DAOs), and other decentralized financial (DeFi) products.
When I started my career in the mid-2000s, corporate audits were standard and the new agents were always the worst to deal with. As little children you had to explain everything to them in detail, and yet they wrote non-factual summaries or incorrect legal opinions. That required escalating cases for a manager to assess or file an appeal. New agents were also often über-aggressive, fighting for small changes to build a reputation because they always had big tax increases on the checks they carried out.
Do not get me wrong. The IRS should hire agents. The situation of recent years has been nothing short of a nightmare. Good luck reaching out to an agent to solve a tax problem! In 2021, the IRS received 282 million calls. Customer service reps answered only 32 million, or 11 percent, of those calls. The IRS should definitely hire more staff to answer phones and resolve issues in a reasonable amount of time.
Related: Biden hires 87,000 new IRS agents — and they’re coming for you
The troubles at the IRS date back to 2011, when major budget cuts led to a staff freeze across the board. The total number of employees at the IRS has plummeted, from 94,711 agents in 2010 to 78,661 full-time equivalents in 2021. This means that adding 87,000 income agents will be more than double the current IRS!
Add to that the approximately 20,000 agents currently eligible to retire from the IRS, and the IRS will need to hire more than 107,000 agents in the coming years. For example, two out of three IRS employees will be total novices in three years’ time. In a perfect world, this could lead to a startup-like culture at the IRS, with innovations and a culture of making a difference. Yes correct. This is the government. They will not run the business efficiently. And these agents who are tracked for their performance will go for the low-hanging fruit with taxpayers who, on investigation, can intimidate them into major changes, which means a big increase in small businesses and individual audits.
In a few years, however, we won’t see many more audits. However, it will take a while for the IRS to find enough employees to fill all those places. The hiring freeze was lifted in 2019, but there has been no actual net hiring yet due to the pandemic. In 2021, the IRS lost 14,500 employees due to retirement or divorce, but gained only 12,500 outside hires.
This failure in hiring was not the result of a lack of trying. In 2021, I was inundated with Facebook ads and posts from recruiters, but they still couldn’t hire enough agents to fill the places of those who were retiring. So you must be wondering, how are they going to find over 100,000 new agents? And will their hiring standards drop significantly to get enough warm bodies in seats?
Then it will be even longer before we see these agents in the field. Once a revenue agent is hired, there is one to two more years of training before they are unleashed on the public.
The most likely agent you will meet, a “Small Business/Self-Employed Revenue Agent in Field Examination,” requires 1,888 hours of training. At 40 hours a week, this equates to 47.2 weeks, which is almost a year after vacation and private time. A “Special Agent for Criminal Investigations” needs 3,904 hours of training, or closer to two years, to get up to speed. Even a “customer service representative” needs 1,500 hours of training, or more than nine months – to answer the phone lines!
As the IRS dwindles in size and struggles to replace retired agents, tax laws and technology-based financial transactions have become increasingly complex. The Tax Cuts and Jobs Act (TCJA) of 2017 was the first major overhaul of the tax system since the Tax Reform Act of 1986. Five years after the TCJA, not all provisions have been implemented. Who knows what strange memos might appear in these uninterpreted areas? Then there are all the gray areas created by different types of cryptocurrency transactions, staking, DAOs and DeFi, with many unique patterns of fact for which the relevant laws have yet to be interpreted by the tax judges.
The outdated IRS computer system adds even more to the challenges we face. The IRS still runs on a 1960s mainframe computer system coded in Cobol. Few current programmers know about Cobol and the IRS has struggled to adapt its systems. During the pandemic, a tax agent admitted to me over a phone call that the IRS didn’t have the code to pause the system that sends automated default notifications to taxpayers.
For the past 20 years, the US Treasury Department has spent billions a year developing a new tax computing system, but there never seems to be a clear timeline of when this system will be released. It always seems about five years out with the ever-floating UKTN. Due to this lack of decent computer systems, many tasks at the tax authorities are still performed manually. The IRS has about 60 case management systems that are not interconnected; the employees of each function must transcribe or import information from other electronic systems and email or fax it to other departments.
Related: Tips for claiming tax losses from the US tax authorities
Despite all of these challenges, the IRS is already indicating that it plans to conduct substantial corporate audits in the coming years. It’s been years since the Coinbase John Doe subpoena, and the IRS still hasn’t done the bulk audits expected, so with staff growth, these are likely to start to increase.
Transfer pricing audits have stalled since the pandemic, but they will certainly pick up again soon – and I expect many crypto firms will also be the target of these audits, especially those in DeFi involving cross-border lending transactions. And for R&D, the IRS has issued two memos in the past year requiring full due diligence and documentation before preparing the tax return, but the R&D credit factories targeting predatory startups have yet to change their business practices, so I expect to see massive audits of R&D credits once enough agents are ready.
Most of the tax accountants I worked with early in my career are long retired. The new generation of so-called “experts” have not had this experience of corporate auditing in their early careers and are totally unprepared for what is on the horizon at the IRS. As a result, a lot of incorrect information is circulating in the tax world. Many advisors who have successfully played the audit lottery for years are lining up to burn both themselves and their clients in the coming audit storm.
When Should Taxpayers Be Afraid? Given the timeline of two to three years to recruit staff and the three-year statute of limitations for auditing most tax returns, the tax years most at risk for auditing are 2021 and beyond. According to the 2019 IRS statistics, individuals with taxable incomes between $25,000 and $500,000 have only about a 0.2% chance of being audited each year, with those who have income of $0 or a net loss for the year of 1. 1% report.
In 2010, middle-income earners only had a 0.7% risk. If $0 or less in earnings was reported, there was a 20.6% chance of an audit — meaning those playing it conservatively are probably still okay. Those who took aggressive stances, however, were at much greater risk and likely faced that 1-to-5 risk of audit.
That is why I recommend that you choose your advisors carefully. Aggressive tax positions should now be avoided unless the benefit outweighs the risk associated with litigation costs. The biggest fallacies I hear in consultation conversations every week usually come from Reddit threads, and trust me, Reddit is not a credible source. Be sure to seek out your advisors and make sure they are licensed and experienced as this will at least give you some reason to waive fines if an aggressive tax position is called into question.
Crystal Stranger is a federally recognized tax authority and the chief operating officer at GBS Tax. She previously worked as a software developer in San Francisco.
This article is for general information purposes only and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of UKTN.