If the IRS questioned your return a few years ago, you probably dealt with a person. In the future, you are far more likely to receive a letter and wait months for anyone to respond. That is the practical consequence of the agency’s budget and staffing cuts, and for most taxpayers, it matters more than the falling audit rate.
The cuts behind this are real. Congress reduced the IRS budget to about $11.2 billion for 2026 — roughly 9% less than the year before — and has proposed cutting it again for 2027. The money, though, is only part of the story.
The bigger change is people. The IRS entered 2026 with about 74,000 employees, down from more than 102,000 a year earlier — roughly a quarter of its workforce. The steepest losses fell on the revenue agents and examiners who handle the complex returns many of our clients file: about a third of them are gone, and that experience takes years to replace.
To put in perspective: the average individual audit rate declined from 0.9% for tax year 2010 to 0.25% for tax year 2019, per the Government Accountability Office, and has run near 0.3% in recent years — roughly 1 in 330 returns. That decline is largely behind us. What moved in the last twelve months is concentrated at the top — and these figures are the IRS’s examination plans, not final counts, since the fiscal year is not over. The agency has recently initiated only about half of what it planned:
The IRS is increasingly relying on automated systems and artificial intelligence to identify discrepancies, match reported income to third-party information, and flag returns with a higher likelihood of errors or noncompliance. Discrepancy scoring, the Automated Underreporter program, and third-party information matching run regardless of headcount. A return is flagged whether or not an examiner is available to work it. Refundable credits such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Premium Tax Credit (PTC) remain key areas of focus due to historically high error rates and billions of dollars in improper payments. The IRS also continues to closely monitor income mismatches (W-2s, 1099s, and other information returns) and questionable deductions and credits that are disproportionate to reported income.
Today, approximately 80% of audits are conducted through correspondence, meaning taxpayers are contacted by mail or electronic notice rather than through an in-person meeting. Face-to-face audits are becoming less common and are generally reserved for more complex or higher-risk situations. Small businesses, especially those operating in cash-intensive industries, continue to receive increased scrutiny due to historically higher levels of underreported income.
The headline numbers describe the average taxpayer. Our clients are not the average taxpayer, and the picture looks different in four ways.
Digital assets. Broker reporting on Form 1099-DA is now flowing to the IRS, with cost basis reporting phasing in. This is the one area where automated matching exposure is rising, while overall audit activity is falling. Reconcile exchange and wallet records against the 1099-DA before the return is filed, not after a notice arrives; a basis that a broker cannot see, including self-custodied positions, cross-platform transfers, and pre-reporting-era acquisitions, is the most common source of a mismatch.
Partnerships and management companies. The IRS’s planned examinations of partnerships fell much less sharply than those for high-income individuals. As a result, partnerships now make up a larger share of a smaller examination population — their relative exposure went up, not down.
High-net-worth individuals. Planned examinations of the $10 million-and-above population fell by roughly two-thirds in one year. That is real relief on the field-audit side — and it is precisely the population for which an unresolved automated notice is most expensive, because the dollars held up in a refund freeze are larger.
Maryland, New Jersey, and New York. State revenue departments continue to receive federal data and have their own budget reasons to act on it. A lower federal audit risk does not translate one-for-one into a lower state risk, and for clients filing in multiple states, the net exposure may not have moved at all.
Practitioners report substantial difficulty reaching the IRS on refunds, notices, and open examinations. A CP2000 that once closed in 60 to 90 days can now take many months to close. The exposure has shifted from the probability of being examined to the time, professional cost, and cash-flow drag of clearing a notice once one is issued, including refunds held while the matter sits open. A smaller IRS is not a faster one, and this one has been unusually unstable: seven different people have led or acted as commissioner since January 2025.
The odds of a full-scale examination are lower than they have been in decades. The odds of receiving an automated notice — and of that notice taking a long time to clear — are not.
If you have an open IRS or state notice, send it to us. Call us at (410) 643-4477 or schedule a confidential consultation. We will read it, tell you what it actually says rather than what it appears to say, and lay out your options for responding — including what happens if you do nothing. Send the notice along with the return it relates to.
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This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice. It should not be relied upon as a substitute for consultation with a qualified professional regarding your specific circumstances and was prepared by KMAF with the assistance of AI-powered editing tools.
