No one wants to be audited by the IRS. And, in fact, very few US taxpayers have been in recent years.
Less than 1% of all returns filed between 2013 and 2021 had been audited as of the end of fiscal year 2023, according to IRS data. More specifically, only 0.44% of individual returns and 0.74% of corporate ones.
That’s partly because the agency for many years did not have a consistent level of resources — financial, human or technological — to do more. The IRS had been in the process of beefing up its enforcement efforts in the past two years thanks to funding from the Inflation Reduction Act, but a substantial amount of that funding has since been clawed back by Congress.
Who was getting audited?
An audit — also known as an examination — is when the IRS asks for more information regarding what you put on your return for a given tax year. That information will then be used to validate the accuracy of the refund you claimed or the taxes you paid. If you end up owing more but fail to pay it on time — with or without an audit — you will get a collections notice.
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Audit rates will differ depending on factors common to select groups of filers, such as income level, credits claimed or if you own a business.
For instance, of the individual returns filed between 2013 and 2021, the IRS reported that it examined 8.7% of those filed by people who reported “total positive income of $10 million or more.”
But among those with incomes between $50,000 and $500,000, the audit rates were 0.5% or less for returns filed in each of those tax years. Audit rates were higher, however, for low-income households that claimed the earned income tax credit — with rates ranging from a low of 0.7% for tax year 2021 to a high of 1.5% in 2013.
How fewer employees and more AI may affect audits
Given the recent upheavals at the IRS, it’s not at all clear what audit rates or audit priorities may be going forward.
A Treasury spokesperson declined to comment when asked what level of audits the current IRS expects to conduct.
On April 15, in a post on X, Treasury Secretary Scott Bessent said, “(W)e are doubly focused on making the IRS work better for American families, at a better price. To that end, we are striving for excellence in collections, privacy, and customer service.”
And during his confirmation hearing in January, in response to questioning from Senator Ron Wyden about tax cheats, particularly wealthy ones, Bessent said, “(I)f there is some large mother lode there, then to figure out how to crack that, whether it’s through AI or some other means, that I will commit to coming back to you.”
The agency is now on its fourth acting commissioner in just three months since the January 20 resignation of Danny Werfel, who had been the Senate-confirmed IRS commissioner since March 2023. And a staff exodus is in progress through a combination of layoffs, retirements and deferred resignations. Tens of thousands of employees — including career-service staffers and leaders with tax administration expertise and institutional knowledge — are planning to leave in the coming months, or are already gone. The lion’s share of the initial staff cuts took place in enforcement — which includes both audits and collections.
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The loss of staff comes as the Department of Government Efficiency is trying to speed modernization at the agency, particularly with artificial intelligence, which the IRS had started testing and using prior to this year.
The combination of more AI with a suddenly reduced workforce concerns experts familiar with audit processes, especially given what they say is the need for careful governance of audits to protect taxpayer rights while also making it possible for the agency to efficiently collect revenue owed. Such revenue is critical to the fiscal health of the United States, which has a record level of debt. As it is, the so-called “tax gap” — the difference between taxes owed and taxes paid — is already estimated at nearly $700 billion a year.
Werfel said he is hopeful that the new team will make faster progress in the use of AI than previous efforts have. But he warned about the consequence of speed at all costs.
“We briefed the [new administration’s] transition team when they arrived and said if you want to downsize, you can create a moonshot of significant downsizing. But if you want to avoid sliding backward on key metrics like customer service and revenue collection, you have to make sure your tech is tested and ready to go,” Werfel said. “Instead, it appears they’ve cut a lot of staff first – and now … they have to figure out the best way to serve taxpayers with staff they have.”
And he cautions that AI can’t adequately substitute for human input and oversight in audits and collections. Not yet anyway.
“We can have the computer next to us telling us which chess moves to make, but a human should confirm that the computer is reaching the right outcome before proceeding with each move on the board,” he said. “The idea that AI will take over or even supplement the audit function to make up for the loss of thousands of revenue agents? It may be possible at some point. But in the interim, there is risk of damage to the government’s financial bottom line.”
Fewer trained staff members may mean the agency won’t be as equipped to handle the complex audits typically associated with wealthy filers, partnerships and businesses.
But automated “correspondence audits,” which are the most typical type of audit conducted, may continue apace. Correspondence audits are done by mail and most often affect filers with simpler tax situations, including lower-income households.
Customer service and data accuracy at risk
With fewer people on board to manage audits, it may be harder for tax filers to reach a human being and get their cases resolved.
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“You have a legal right to finality and to quality customer service,” Werfel said. “You may get a letter saying you owe $300 and you’re like, ‘What? I don’t owe $300!’ You may owe the money. You may not. But while they build the AI bot that may be able to eventually help you, you can’t get through to anyone.”
If so, however, it wouldn’t be the first time filers are left hard up. In her 2020 report to Congress, National Taxpayer Advocate Erin Collins cited as one the IRS’s most serious problems the “unnecessary delays and difficulties reaching an accountable and knowledgeable contact” for taxpayers in correspondence audits.
But Nina Olson — who was Collins’ immediate predecessor and now runs the Center for Taxpayer Rights — suggested things could get worse with a heavier reliance on AI coupled with reduced staff — both at the IRS and at the Taxpayer Advocate Service (TAS), an independent entity within the IRS.
Even greater taxpayer frustration: There may not be anyone – in IRS enforcement, TAS or the independent Office of Appeals – to consider many cases where a tax filer can show proof that an automatically generated default assessment by the IRS is wrong in terms of what they owe or the refund amount they’re due. In the past, Olson said, TAS has been able to help people challenge such assessments. “They go back to the IRS and say, ‘Look at this.’ And the agency says ‘You’re right. The taxpayer doesn’t owe this.’”
Faulty AI models: If a filer does have a hard time getting help through normal channels, the AI model — which will identify future returns to audit in part based on prior audit case characteristics — may end up being trained on inaccurate data (i.e., the IRS’s original default assessment rather than the characteristics of audits in which a tax filer challenges an assessment and prevails).
As Olson put it at an April 15 Tax Policy Center event, cutting too many people at the IRS who can help filers address audit and collections issues “makes it more likely the machines are going to be wrong and will get false positives (in the future).”