Teaching Tax Flow: The Podcast

In this episode of the Teaching Tax Flow podcast, Chris and John dig into the IRS Databook for fiscal year 2025, focusing specifically on compliance and enforcement. This episode is part two of a detailed exploration, following a previous discussion on the administrative insights from the IRS report. Chris and John present their top seven observations, offering nuanced analysis on trending enforcement practices and audit patterns. This episode is particularly insightful for high-income earners and business entities curious about their audit risks and IRS examination techniques.

This discussion outlines a declining trend in audit coverage, with specifics indicating that IRS audits are becoming less frequent but more targeted, especially aimed at higher-income returns. The discussion touches upon IRS efforts to refine their detection mechanisms, resulting in large-scale tax collections despite fewer audits. Their analysis also sheds light on a significant increase in substitute for return enforcement, where the IRS files returns automatically for non-filers. With attention to detail, they reveal the IRS's strategic shift to correspondence audits, leveraging data and technology for refined enforcement.

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  • (00:00) - Summary
  • (00:00) - Exploring IRS Compliance and Enforcement in Tax Reporting
  • (03:07) - IRS Audit Trends and High-Income Taxpayer Focus
  • (09:17) - Importance of Correct SIC Code for Self-Employed Tax Filings
  • (10:56) - Field Audits Yield Higher Tax Adjustments Despite Fewer Examinations
  • (14:55) - Resource Allocation and Business Strategy in Examination Processes
  • (15:58) - IRS Crackdown on Non-Filers with Substitute Returns
  • (18:07) - IRS Compliance Trends and Taxpayer Examination Strategies
  • (20:48) - Investment Advisory and Securities Services by Cabin Entities

Creators and Guests

Host
Chris Picciurro
Founder, Teaching Tax Flow
Host
John Tripolsky
VP of Marketing, Teaching Tax Flow

What is Teaching Tax Flow: The Podcast?

Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.

Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.

In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.

Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.

Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com

John Tripolsky:

Welcome back to the Teaching Tax Flow podcast, everybody. Episode 196, part two of two. We are looking at that IRS data book for fiscal year 2025 and why we're at part two, right? This last episode, we looked at really the administrative observations overview of what that data book has in it. This time, we are diving even deeper into the C, I guess we can call it, of the compliance and enforcement side.

John Tripolsky:

So if you don't know what that is, you're about to find out as always. Chris Picciurro, welcome back to your own show, sir. Let's cut into this one. This is again where I get a little dorky because I love trying to find correlations in this data book when these pop up. What do we got?

Chris Picciurro, CPA:

Well, excited. Yep. This year, we're going to do two episodes. This is the second episode. So if you didn't watch or listen to last one, our last pod episode, definitely check it out.

Chris Picciurro, CPA:

We dove into the the reporting side, administrative side of the data book. This episode, we're gonna give you our top seven observations from the compliance and enforcement side. Remember, one of the three laws of teaching tax flow, tax agencies are involuntary business partner. Wouldn't it be nice to have the playbook if you're of your opponent before you play them in a sport or have all the interview questions or have a copy of the ACT exam before you sat down and took it? That's it.

Chris Picciurro, CPA:

We have the playbook from the IRS. We have their annual report. In teaching tax law, we do not look at the IRS as an enemy. We don't look at them as an ally. They are an involuntary business partner.

Chris Picciurro, CPA:

They are an administrator in the tax system. We talk a lot about that in defeating taxes, the book. Oh, grab a copy, by the way. But let's jump into your top our top seven observations. And and, again, I think that people are gonna be keen keenly interested in what we're going to to divulge here.

Chris Picciurro, CPA:

Remember the federal government's fiscal year end September 30, so this is all the information from 10/01/2024 through 09/30/2025. So this is really recent rather recent information when it comes to government reporting.

John Tripolsky:

Yeah. Fresh off the press. So I got my pen and my trusty pad of paper here. I got a couple of things written down. But before we get into this one, Chris, let's, if you can, for those that aren't familiar with it, let's define what compliance and enforcement really is.

Chris Picciurro, CPA:

Right. Sure. Well, compliance and tax compliance is is the and enforcement means the that are you following the rules, and how's the IRS enforcing the rules? How are they are they examining people? Are they auditing people?

Chris Picciurro, CPA:

How are they auditing people? What people are they auditing? How is how is that correlating to the so enforcement has to do with compliance because tax compliance is the is the process of filing a tax return, and enforcement is the process of making sure that the tax returns you've filed are accurate. Where we come in, legally and ethically reducing the tax you pay on the said tax return. So, yeah, let's jump in.

Chris Picciurro, CPA:

Number one, which I think most people are gonna be keenly interested in, as I said, audit coverage declined overall. So for the tax years between 2015 through 2023, the IRS examined or audited point 36% of individual returns. So approximately one out of every 290 to 300 individual returns have were audited. For corporations, examination rate is point 57%. So approximately every one out of 200 corporate returns are audited.

Chris Picciurro, CPA:

One out of 300 individual returns were audited between 2015 and 2023. So that's a little bit of a decline from previous years. So so, ultimately, audit coverage was lower overall, but the IRS still focuses heavily on certain categories of taxpayers. So your chances of getting audited are less right now than in the past.

John Tripolsky:

There you go. And that and I'm sure so many

Chris Picciurro, CPA:

based people on your profile.

John Tripolsky:

Exact and I'm glad you said that because I'm sure a lot of people are waiting there like a cliffhanger, right, to tell them what triggers that audit. And they're I mean, we don't know exactly. It's a combination. It's, you know, luck of the draw, we can call it. Right?

John Tripolsky:

I'm sure some things like we've mentioned in past episodes can increase it, but there is no checkbox you can do to avoid it. Right?

Chris Picciurro, CPA:

Right. There there's there's a well, each we know that each return is scored by the IRS. We don't know exactly how that scoring occurs and that that that scoring indicates the chance that there's a compliance gap or there's a an audit. So let's look at let's start diving in now. Who is getting audited?

Chris Picciurro, CPA:

Even though less people are. High income taxpayers remained a major compliance focus. So for individuals with with $10,000,000 or more of total positive income, the cumulative examination rate was 7.9%. So if your income is 10,000,000 or more, first of congratulations. This is somewhat your audit rate is about 8% as opposed to point three six.

Chris Picciurro, CPA:

So ultimately, it's about 20 times more likely you're gonna get audited if your income is $10,000,000 or more, and that's a consistent figure from the previous So, John, I'm sorry you've got a high audit risk.

John Tripolsky:

Yeah. You know, we'll see what happens. And and I forget what episode it was, Chris, but I know we we talked about this one a bit, and it was a great conversation. I wish I remembered which episode it was. I'll to go look at our transcripts.

John Tripolsky:

But I remember and I'm not gonna take it, you know, verbatim here, but you had mentioned why that likely is the case, right, is it's it's probably because there's a lot more, again, activity on those returns. There there's all kinds of moving parts. And when there's that many moving parts, it's not like the IRS is going in and saying, you know what? We are gonna find, you know, this massive discrepancy and go after them and you know, it's gonna be this huge, you know, public court case or any of that. It's not really that at all necessarily.

John Tripolsky:

There's just that discrepancy and they're trying to solve that. They're not going in badges flying, guns ablaze, and all this stuff. They're just trying to find the discrepancy. Correct? And there's

Chris Picciurro, CPA:

a lot more meat on the bone if your income is $10,000,000.

John Tripolsky:

Very true.

Chris Picciurro, CPA:

Are you you you know, that's or more. Right. Here's the third one. Very interesting. We're talking about IRS audits.

Chris Picciurro, CPA:

The IRS closed fewer audits in fiscal year twenty twenty five. So they closed a little under 500,000 audits. 497,621 tax return audits were closed in 2025 fiscal year. That's down from five hundred five thousand seven fifteen. So the point is 7,900 fewer audits were closed, which is a decent amount.

Chris Picciurro, CPA:

I mean, that's It's a good amount. That's a good amount. Right?

John Tripolsky:

And when you say closed, like, what exactly does that mean? Like, they've closed the book. They've either found something or not found something, but they're not moving forward with anything else.

Chris Picciurro, CPA:

Right. The it's resolved. Yep. The audit's been closed. It's not lingering around like a bad itch.

Chris Picciurro, CPA:

So so what does that represent? It's about, you know, one and a half to yeah. About one and a half percent less audits are closed than the previous year. Now there could be because there are staffing issues with IRS. It could be a lot a lot of different things.

Chris Picciurro, CPA:

Here's another one, John. Number four. Most audits are still done by mail. So in our world, we call the we have two kinds of audits. Right?

Chris Picciurro, CPA:

We have a correspondence, meaning it's done by mail, or we have a field audit, meaning someone's meeting you in person. Most people fear the field audit the most. Right? Something by mail. Now we always talk about in teaching tax on in our and within our media company here that don't ignore an IRS notice.

Chris Picciurro, CPA:

That's the worst thing you could do. So if you get one, though, address it. But for the fiscal year 2025, over 81% of IRS audits were correspondence examinations. Meaning, they mailed you a letter, said, sorry, John. You said your taxes this amount.

Chris Picciurro, CPA:

This doesn't match our records. We feel it's this amount. That's up from 78% the year before. A 3% increase is very significant in one year. So what's that telling us?

Chris Picciurro, CPA:

The IRS is probably understaffed. They're starting to use software, probably AI, some type of matching programs to identify when something doesn't match the transcript. So remember, most of the forms you receive, tax forms, are also furnished to the IRS. So when there's a matching problem or its IRS might say, I'm gonna audit one specific thing. So for instance, if you're let's say you're self employed.

Chris Picciurro, CPA:

I'm sorry? Well, sir, maybe mileage. Yeah. Let's say you're self employed, and your mileage makes up 50% of your your income. Okay.

Chris Picciurro, CPA:

Here's what we you have to understand. If you put the wrong SIC code sender sec oh

John Tripolsky:

gosh. What does it stand for? I'm stumped here.

Chris Picciurro, CPA:

I I thought the SIC code is the industry code sector. I think it's like sector industry code. But whatever. You put the wrong six digit code on your schedule c, and you don't say that you are a Uber driver or a meal delivery driver, and you put in there consultant. And 50% of your income goes to your mileage.

Chris Picciurro, CPA:

You're there's a higher chance you're gonna get audited versus if you use the right industry, and that could be a field audit. They could just send you, hey. Something looks funny. Send me your mileage log. Boom.

Chris Picciurro, CPA:

So Done. It's standard industrial classification. Is that it? Pardon?

John Tripolsky:

Standard industrial classification?

Chris Picciurro, CPA:

That sounds yes. SIC.

John Tripolsky:

I had to look it up. I completely forgot. So

Chris Picciurro, CPA:

So four out of five audits are done by mail. That gives you time to organize your documents, gives you time to get the right proper representation, and that's up 3%. The remaining 19% are still field audits. Oh. But field audits generated $19,100,000,000 of additional tax, where correspondence audits only created 7,700,000,000.

Chris Picciurro, CPA:

So field audits are fewer, but they produce much, much larger tax adjustments. So think about that. They're going in hot and heavy. Right.

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Chris Picciurro, CPA:

So field audits, as I do some quick math here, yeah. Field audits produce almost over 70% of the dollars but represent less than 20% of the examinations.

John Tripolsky:

Interesting. I don't even think we've ever covered I don't know if we've ever actually mentioned that in the previous years that we've discussed these. Maybe maybe not, but that's pretty impactful. That's huge.

Chris Picciurro, CPA:

Yeah. I mean, field audits are typically reserved for people with more complex tax issues, larger dollar returns, businesses, and taxpayers with much more complicated So if you're getting a field audit, you real I mean, they're all serious, but that's much, much more serious. Right.

John Tripolsky:

So if you're making a $100,000,000 a year, you might as well get some couches ready for your auditors every year.

Chris Picciurro, CPA:

Right. Or, you know, one of the things that we do in our private CPA practice and most really good practitioners do, if you're a tax professional, you're watching this or listening to this, we want your comment. Comment what you guys are doing. We and and and this is the tax preparation team. So I'm in on as you know, I'm part of the private CPA practice.

Chris Picciurro, CPA:

Tax prep I'm on the tax planning side, but our prex preparers have a process where we're actually preparing the return as if it was gonna get audited. All of the work papers, all of the source documents are very organized and put in and and tied out, ticked and tied. So we have several layers of of review. So if we did get an audit, we're prepared for it. Now could the IRS say, well, this business trip, you know, they could argue some things.

Chris Picciurro, CPA:

They could they but but at least, yo, we're looking at four out of five audits or correspondence that we can easily reply to. Mhmm.

John Tripolsky:

So, really, the work's already done, and it's like you said, you're in preparation for if that were to come upon anyways.

Chris Picciurro, CPA:

Right. You you should be preparing a tax return with the assumption that it's gonna get audited. And if it does get audited, how should am I do I have all the information available now instead of scrambling around.

John Tripolsky:

Yeah. It's like running electrical or plumbing in a house. Mark where you put the wires. Mark where you put the pipes. In case you wanna

Chris Picciurro, CPA:

hit a

John Tripolsky:

picture frame there.

Chris Picciurro, CPA:

And something could change or something, you know, but yeah, absolutely. Absolutely. So the sixth out of seven, refund protection exams became more effective. So the IRS conducted almost 21,000 refund protection exams for the fiscal year 2025, and that was down from a little under 24,000. But the dollars protected increased from 8,800,000,000 to 10,700,000,000.

Chris Picciurro, CPA:

So the IRS appear excuse me. The IRS appears to be identifying larger, more significant questionable refunds claims while conducting fewer refund protection exams. So, again, here here's the theme, John. Less enforcement by numbers, bigger dollars collected. Why?

Chris Picciurro, CPA:

Because the IRS is getting better at identifying, in my opinion, the higher risk, higher dollar cases.

John Tripolsky:

Which makes sense to them. Oh, no. Sorry. Go ahead.

Chris Picciurro, CPA:

Go ahead. Yeah. And not just throwing a blank like, hey. Let's yeah. They're they're much more targeted.

Chris Picciurro, CPA:

Let's put it this way at who they're looking at.

John Tripolsky:

Because like like we've mentioned earlier on too, you know, they're this might have been the last episode, but, you know, they're allocating resources, staffing, time, all this stuff towards these examinations. Right? And at the end of the day, if you think about them back to them being your, you know, business partner. I know some people cringe at thinking that. If you're in business for anything, you're not gonna waste your time, you know, cleaning up the trash if you have somebody that does.

John Tripolsky:

You know what mean? Like, they're they're going after where the dollars are for them. Otherwise, they don't exist. Right? They got bigger problems.

Chris Picciurro, CPA:

Right? Exactly. They so not final one, number seven. This is this is interesting because I just had a conversation with someone about I don't know why this person person I was talking to had someone in their life that didn't file tax returns, and they were assessed about $300,000 of tax. I had another person that I ran into over the last week that didn't file a tax return and got assessed $180,000 of the tax that they really don't owe.

Chris Picciurro, CPA:

My point is substitute substitute for return enforcement surged. So automated substitute for return closures increased from 442,000 to 592,000. That's a 34% increase. The assessment dollars went up dramatically from 82,000,000 to $2,900,000,000. So what does this mean?

Chris Picciurro, CPA:

The IRS is saying, if you were supposed to file a tax return and you didn't, they have the authority to file the return on your behalf based on the information they have and assess you tax. So, John, if you sold a million dollars worth of digital assets, let's say a cryptocurrency, And didn't and because you didn't make money on it quote unquote or you didn't make a lot of money. You say, I don't have to put that on my tax return. I'm not gonna file. I don't that was my only income I don't file.

Chris Picciurro, CPA:

The IRS will file that for you and they'll say, alright, John. You have a million dollars of sales and you have a million dollar capital gain. You have no evidence of cost basis. So the point think about this. 34% in one year increase on on non filers.

Chris Picciurro, CPA:

So substitute for return means the IRS. Hey. Don't worry, taxpayer. We're the IRS. We're gonna file that return for you, and we're gonna make it, you know, as as as as painful as possible.

Chris Picciurro, CPA:

So there's a major warning sign for non filers because when the IRS prepares a substitute return, it will not include deductions, credits, or other taxpayer favorable items that would have appeared on the return otherwise. And think about that from $82,000,000 to $2,900,000,000 in one year. So the IRS to me, they're just getting smarter.

John Tripolsky:

And with that, I mean, I I highly doubt that they are gonna do it for you moments after a text deadline passes, and you're probably not gonna get that notice that they've done it for you moments after they do it. So interest penalties and everything else is probably gonna be stacked on top of it, which then there, you know, I imagine that in this case, people are gonna have to be on the defense instead of the offense at that point,

Chris Picciurro, CPA:

is not a pleasant place to be. Right? So what's as we wrap it up, what are the themes? Less compliance cases, higher risk taxpayers being examined, non filers being taken care of rather promptly, and increase in, compliant or, in in correspondence examinations, decrease in in person examinations.

John Tripolsky:

Lots of new stuff. And this Christina, mentioned earlier on this one and the other one multiple times a past episode. You know, this is a an IRS playbook. And to me, right, I'm when you say that, I think of, you know, alright. It's gonna tell us what they're going to do, which it does.

John Tripolsky:

Right? Like, literally, that last example we gave, I think hit it on the head. It's showing a trend of what they're doing more of, and that trend is likely to continue in that way. So like you said, here's your here's your warning sign. Here's the big red flag to you to get your beep together if you haven't done it because they're they're coming for you if not.

John Tripolsky:

They're they're no longer just sitting by the desk drinking Diet Cokes and sipping on ramen noodles and stuff during the day. They're actually going to work. Well, bad example, but you know where I'm going. But so anybody that's listened to this one and that last one, right, we've we've done some different this year. We've talked about a little earlier on.

John Tripolsky:

We've split this into two parts. Right? If there's anything and Chris, you mentioned as well, we'll put the link in the show notes here. Click on that. You don't have to read the entire thing if you don't want to, but take a peek at it and see what areas in that really pique your interest.

John Tripolsky:

Right? If there's anything in there that we didn't cover that you want to know more about, obviously, we can't cover the entire Databook even if we did this over 20 episodes. Let us know what you think. Let us know those topics. Message us however you feel comfortable.

John Tripolsky:

Drop us a line. Let us know, and we'll be happy to get on it. Right there, big guy?

Chris Picciurro, CPA:

Sounds good. Yeah. Would love to hear from you.

John Tripolsky:

Awesome. Awesome. Well, Chris has been doing this for a long time. You do not want Neef ever filing a return for anybody. This guy knows way more than I do, so we'll have him back to his own show as always.

John Tripolsky:

So everybody, you have a great, great week. Let us know your thoughts. Check out the defeatingtaxes.com. Great resource for you. We'll drive you a couple places.

John Tripolsky:

Again, check it out. We'll see you back here again next week on the teaching tax flow podcast. Have a great week, everybody.

Disclosure:

The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.

Disclosure:

Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment advisor. Chris Picciurro is a registered representative of Cabin Securities and an investment advisor representative with Cabin Advisors LLC, teaching Tax Flow as an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.