Home CryptocurrencyBitcoin Get ready for a swarm of incompetent IRS agents in 2023

Get ready for a swarm of incompetent IRS agents in 2023

by SuperiorInvest

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 discussed the extent of this pain. Still, it’s something to think about when you consider that most of the upcoming audits will be conducted by new agents, many of whom will be hastily hired and work with minimal supervision.

Playing the audit lottery will not be smart in future tax years. Taxpayers should protect themselves now, especially when they profit from statutory gray areas – such as staking cryptocurrencies, investing through decentralized autonomous organizations (DAOs) and more decentralized finance (DeFi) products.

When I started my career in the mid-2000s, business audits were standard and new agents were always the worst to deal with. You had to explain everything to them in detail like little children and they still wrote non-factual summaries or incorrect legal opinions. This required cases to be escalated for a manager to review or file an appeal. The new agents were also often very aggressive, fighting for small changes to build a reputation for always raising taxes significantly in the audits they conducted.

Don’t get me wrong. The IRS needs to hire agents. The situation in recent years has been a nightmare. Good luck getting an agent to solve your tax problem! In 2021 IZS accepted 282 million phone calls. Customer service representatives answered only 32 million, or 11 percent, of those calls. The IRS definitely needs to hire more staff to answer the phones and resolve issues in a reasonable amount of time.

Related: Biden is hiring 87,000 new IRS agents — and they’re coming for you

The problems on the IZS dating back to 2011, when major budget cuts led to a blanket hiring freeze. The total number of IRS workers has dropped significantly, from 94,711 agents in 2010 to 78,661 full-time employees in 2021. That means adding 87,000 revenue agents will more than double the size of the current IRS!

Add to that the roughly 20,000 agents eligible to retire with the IRS right now, and the IRS will need to hire more than 107,000 agents over the next few years. Two out of three IZS employees will thus be complete newcomers in three years. In a perfect world, this could lead to a startup-like culture at the IRS, with innovation and a culture to drive change. Yeah, right. This is the government. They will not manage things effectively. And these agents, who are monitored based on their performance, will go with taxpayers who can force big changes, for big changes, which means a big increase in small business and individual audits.

Sources of federal tax revenue in billions, 2000-2021. Source: Cato Institute

However, we will see an excessive increase in audits in a few years. It will take some time for the IRS to find enough employees to fill all of these positions. The recruitment freeze was lifted in 2019, but due to the pandemic, no real net recruitment has yet taken place. In 2021 IZS lost 14,500 employees due to retirement or separation, but only 12,500 acquired external employees.

This hiring failure was not for lack of trying. In 2021, I was bombarded with Facebook ads and recruiting messages, but they still couldn’t even hire enough agents to fill the positions of those who were retiring. So one must surely wonder how they find over 100,000 new agents? And will their recruiting standards be lowered substantially to have enough warm bodies on the chairs?

Then it will be even longer before we see these agents in the field. Once a revenue agent is hired, there is another year or two of training before they are posted.

The most likely agent you’ll encounter, “Small Business/Self-Employed Field Agent,” requires 1,888 hours of training. At 40 hours a week, that’s 47.2 weeks, which is almost a year after vacation and personal time. “Special Criminal Investigation Agent” requires 3,904 hours of training, or nearly two years, to get up to speed. Even a “customer service representative” needs 1,500 hours of training, or more than nine months — just to answer the phone lines!

As the IRS shrinks and tries to replace retiring agents, tax laws and technology-based financial transactions are becoming more complex. Tax Cuts and Jobs Act (TCJA) in 2017 was the first major overhaul of the tax system since the Tax Reform Act of 1986. Five years after the passage of the TCJA, not all provisions have yet been implemented. Who knows what strange notes might begin to emerge in these as yet uninterpreted areas? Then there are all the gray areas created by the various types of cryptocurrency, staking, DAO and DeFi transactions, with many unique fact patterns for which the relevant laws have yet to be interpreted by the tax courts.

The IRS’s antiquated computer system further contributes to the challenges we face. The IRS still runs on a mainframe computer system from the 1960s that is coded in Cobol. Few current programmers know Cobol, and the IRS has struggled to modify its systems. During the pandemic, the executive admitted to me that the IRS does not have a code to suspend the system that sends automatic delinquency notices to taxpayers.

Over the past 20 years, US Department of the Treasury spends billions a year developing a new tax computer system, but there never seems to be a clear timeline for when the system will be on the market. It always seems like five years with a constantly floating deadline. Because of this lack of decent computerized systems, many tasks at IZS are still done manually. The IRS has about 60 case management systems that are not interconnected; Employees of each function must transcribe or import information from other electronic systems and mail or fax it to another department.

Related: Tips for claiming tax losses with the US Internal Revenue Service

Despite all these challenges, the IRS is already signaling that they intend to begin conducting major business audits in the coming years. It’s been years since Coinbase’s John Doe subpoena and the IRS still hasn’t done the expected mass audits, so they’ll likely start increasing as headcount increases.

Transfer pricing audits have stalled since the pandemic, but are sure to pick up again soon – and I expect many crypto businesses, especially those in DeFi with cross-border credit transactions. And then for R&D, the IRS has issued two memos in the past year requiring full due diligence and documentation before a tax return is prepared, but the R&D credit mills that prey on startups have yet to change their business practices, so I expect that see mass audits of R&D credits once enough agents are ready.

Most tax accountant I worked with at the beginning of my career long since retired. The new generation of so-called “experts” didn’t get that business audit experience early in their careers and are completely unprepared for what’s on the horizon at the IRS. Because of this, there is a lot of misinformation floating around in the tax world. Many advisors who have successfully played the audit lottery for years are in line to burn themselves and their clients in the coming audit storm.

When should taxpayers be worried? Considering the two- to three-year timeline for staffing and the three-year statute of limitations for auditing most tax returns, the tax years most at risk for an audit will be 2021 and beyond. According to 2019 IRS statistics, individuals with taxable income between $25,000 and $500,000 have only about a 0.2% chance of being audited each year, with those reporting $0 in income or a net loss for the year at 1.1 %.

Audit Rates by taxable income in 2019. Source: Government Accountability Office

Back in 2010, incomes in the middle range were only 0.7% at risk. If income of $0 or less was reported, there was a 20.6% chance of an audit – meaning those who play it conservatively will probably still be fine. However, those who took aggressive positions were at much greater risk, with a 1 in 5 risk of being audited.

For this reason, I recommend choosing your advisors carefully. Aggressive tax positions should be avoided right now unless the benefit outweighs the risk of litigation costs. The biggest fallacies I hear on consulting calls every week come from Reddit threads, and trust me, Reddit is not a trusted source. Be sure to research your advisors and make sure they are licensed and experienced, as this will at least provide a reason to waive penalties if an aggressive tax position is challenged.

Crystal Stranger is a federally licensed tax EA and COO of GBS Tax. She previously worked as a software developer in San Francisco.

This article is for general informational purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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