The agency itself recently stated IRS audits are fewer in number but increasingly aggressive based upon the “decrease in resources available for examinations.” AI has become the agency’s primary tool to identify tax return anomalies, errors, and omissions, and target appropriate taxpayers for closer examination and/or audit.
Key Takeaways From IRS Audits Are Fewer in Number but Increasingly Aggressive:
- Statistically, IRS audits are fewer in number than they were a decade ago. Reduced volume does not equate to a reduced risk. It means the agency is selecting cases more carefully and pursuing them with greater precision.
- Modern data analytics and sophisticated Artificial Intelligence (AI) systems allow the IRS to identify patterns, inconsistencies, and high-probability targets.
- IRS targeting and investigation may be due to errors within the return(s) themselves, or to streams of data flowing into the agency from Foreign Financial Institutions (FFIs), crypto exchanges and wallets, investment houses, or foreign tax authorities under bilateral and regional agreements and treaties based on FATCA.
- It is important to understand the strategy behind any audit, the auditor’s tactics, and the appropriate approach to limit exposure and resulting exposure(s).
- Taxpayers facing an investigation or audit should carefully consider their options, including consulting an experienced tax attorney before responding directly to the IRS.
- Reduced volume does not equal reduced enforcement. It means the cases that result in investigation or audit carry much higher financial and legal risk.
IRS Audits Are Fewer in Number but Highly Targeted and Aggressive
Many taxpayers assume that if they have not heard from the Internal Revenue Service, they are safe. Statistically, IRS audits are fewer in number than they were a decade ago. That reality, however, should not be misunderstood or taken for granted by U.S. taxpayers. Reduced volume does not equate to a reduced risk. It means the agency is selecting cases more carefully and pursuing them with greater precision.
When IRS audits are fewer, the cases that move forward are often those in which the government believes there is meaningful revenue to recover. Modern data analytics and sophisticated Artificial Intelligence (AI) systems allow the IRS to identify patterns, inconsistencies, and high-probability targets. If your return is selected for review, it won’t be due to randomness or bad luck. Sophisticated systems and algorithms have already reviewed the data in your returns, and the agency believes adjustments are likely.
This may be due to errors within the return(s) themselves, or to streams of data flowing into the agency from Foreign Financial Institutions (FFIs), crypto exchanges and wallets, investment houses, or foreign tax authorities under bilateral and regional agreements and treaties based on FATCA.
This changes the psychology of an audit. An IRS notification letter is no longer a routine verification process in most instances. It is an investigation with a purpose.
The Realities Facing U.S. Taxpayers
Taxpayers should understand several practical realities:
- Selection is based on targeted patterns, often data-driven, and is not random or accidental.
- The IRS is likely to have third-party documentation before contacting you.
- The scope of the audit can quickly expand beyond the original issue if not carefully managed by an experienced tax attorney.
- Penalties and interest accumulate quickly.
- Statements and disclosures made by the taxpayer before or during the process audit substantially affect the outcome.
- U.S. taxpayers are not required to communicate directly with the IRS when a tax attorney represents them.
The instinct to “just cooperate and explain everything” is usually based on a combination of good intentions and fear. However, these disclosures most often create unintended consequences. AI applications, IRS revenue agents, and agency examiners are trained professionals. Their role is to identify discrepancies and assess additional tax where supported by evidence. Casual explanations, incomplete documentation, or volunteered information can broaden the examination and increase proposed adjustments.
The IRS Always Has a Strategy Behind Every Investigation or Audit – You Should Too
It is important to understand the strategy behind any audit, the auditor’s tactics, and the appropriate approach to limit exposure and resulting exposure(s). The IRS often begins with a focused inquiry — a particular deduction, business loss, offshore account, or reporting inconsistency. If documentation is incomplete or answers raise new questions, the review can expand to additional years or issues. What begins as a narrow inquiry can quickly become a comprehensive examination.
While IRS audits are fewer in number, the agency’s strategy is highly focused on measurable results. That may include:
- Disallowing deductions that lack strict documentation/
- Recharacterizing income or expenses.
- Examining related-party transactions, offshore accounts and assets, as well as unreported or under-reported income.
- Reviewing lifestyle indicators compared to reported income
- Assessing civil penalties for negligence or substantial understatement
This does not mean the IRS is acting improperly. It means the agency is intently focused on enforcement efficiency and generating maximum revenue from each interaction. From the government’s perspective, limited resources are to be directed toward cases where adjustments and resulting revenues are most likely.
U.S. Taxpayers Contacted by the IRS Should Consult with an Experienced Tax Attorney
Taxpayers facing an investigation or audit should carefully consider their options, including consulting an experienced tax attorney before responding directly to the IRS. Many individuals believe that speaking personally with an examiner demonstrates good faith. In reality, early statements and the provision of too much information (or the wrong information) can not only shape and expand the audit’s focus. They can result in substantially increased financial exposure. Once a position is documented in IRS notes, it becomes part of the record.
Professional representation serves several critical functions:
- Controlling the flow of information
- Limiting the scope of document production
- Ensuring responses are accurate and properly structured and documentable
- Protecting privileged communications where applicable
- Negotiating proposed adjustments, while preserving the ability to appeal any adverse finding
An experienced tax attorney understands both the procedural rules and the strategic considerations. Representation is not about confrontation. It is about ensuring the process remains limited, fair and properly focused.
It has also become essential for most U.S. taxpayers to maintain disciplined awareness, understanding, documentation, and compliance before any audit begins. This is especially true for U.S. taxpayers and expatriates living abroad, as well as for foreign nationals living and working in the United States. The most effective defense is preparation. That includes:
- Maintaining thorough, accurate, and contemporaneous documentation.
- Maintaining strict separation of personal and business finances.
- Reconciling third-party reporting data and forms, especially if the information is from an offshore source. (It is important to note that the GAAP accounting principles of the United States are quite different from the International Financial Reporting Standards or IFRS, used to create reporting on everything from investments and business activities to retirement accounts and mutual funds.
- Reviewing prior returns for consistency and accuracy.
- Correcting errors promptly when discovered.
Waiting until contact from the IRS to organize records places the taxpayer at a disadvantage.
The broader message is straightforward. While IRS audits are fewer in number, they are often more targeted and more assertive. The absence of widespread audits should not encourage complacency. If your return attracts attention, the stakes can be significant, including tax assessments, penalties, and accumulated interest.
An audit is a legal and financial process. It is not a casual conversation. With proper preparation, structured responses, and experienced guidance, U.S. taxpayers can protect their interests and limit exposure. The key is to respond deliberately rather than emotionally.
Reduced volume does not equal reduced enforcement. It means the cases that result in investigation or audit carry much higher financial and legal risk.
Generally speaking, the IRS already has a plan for your audit and a target amount of “additional revenue” it expects to generate. What do you need to know if the IRS has contacted you regarding an audit? Allen Barron has prepared a free white paper, “What to Expect from an IRS Audit,” which outlines the IRS audit process and important protections you should be aware of before responding to any IRS contact. Remember, many taxpayers are unaware that it is not in their best interest to speak directly with the IRS. The IRS revenue officers (auditors) are highly skilled and trained. They know how to draw information out of a taxpayer, many of whom offer up far too much information in an attempt to come across as “honest” or “cooperative.” The fact is, the IRS uses this information against you to increase the amount of taxes you will ultimately owe at the end of the audit.
Your experienced domestic and international tax attorney, Janathan L. Allen, and the supporting accounting and business professionals of Allen Barron, Inc. work to limit the scope of your audit and to minimize or eliminate any additional payment you may be required to make to the IRS. If the IRS has contacted you for an investigation or audit, it is important to realize that IRS audits are fewer in number but increasingly aggressive, and they have targeted you because they intend to get you to write a substantial check.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470. Ask about the protections of the attorney-client privilege that are not available with a CPA, tax preparer or other financial professional.
