Ep. 81 | A Look Into The 2023 IRS Data Book
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John Tripolsky:Hey, everyone, and welcome back to the Teaching Tax Flow podcast, episode 81 today. We're gonna take a look at something you may not even know exist. That's the IRS, the Internal Revenue Service, data book. So before we jump into that, as always, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:So welcome back everybody. We already know that this is your favorite tax podcast. Hopefully, your favorite podcast of any that are out there. And today we're gonna look at something. As I mentioned here in the intro, you probably didn't even know exists on this planet we call earth.
John Tripolsky:Heck, you might not even like anything that the IRS puts out, but I can almost guarantee that what we're gonna talk about today is gonna surprise you. Maybe for the better, you know, maybe you'll be a little PO'd, but who knows? Regardless, we're gonna hit you with some great, great numbers that the IRS put out in their data book for 2023. But I guess we need to invite this guy back again considering it is his show, Chris Pacuro, the bald and beautiful gentleman. How are we doing today?
Chris Picciurro:I am great. The bald and beautiful, was that a sit was that like one of those raunchy TV series they were on during the day, or was that the Bold and Beautiful? I don't even know what they those what were those called again? They're, like, not sitcom. They're,
John Tripolsky:soap operas. Right? Soap operas.
Chris Picciurro:Yeah. I I think we should make one the Bald and Beautiful, not just the the the the bold and beautiful. John, speaking of handsome bald men, which I am not included in that population, you were recently visiting, here down in gorgeous in historic Franklin, Tennessee. You were kind enough to attend my youngest son Luke's travel baseball game, and there is a very, very nice gentleman that's a father of one of the other kids that is also has a bald head and an olive complexion, and him and I sometimes get mistaken for each other. In that particular day, we had the exact same attire on, black shorts and a gray t shirt, And, and then there's another gentleman that had the same haircut.
Chris Picciurro:John, we had we were having a conversation, 4 of us, where you were the only one with the with hair, and and we know that you have an amazing mane.
John Tripolsky:Oh, and but, honestly, you know what? And it's funny because your wife had pointed that out, and, yes, the, the fellow father of that great guy, ironically enough, he's from the same area that I live in. But you know what I really felt like there? And you know what? We can tie this into the IRS.
John Tripolsky:Right? Sometimes people are very uncomfortable with, you know, what you know, whose team is the IRS? You know? Oh, you know, the Internal Revenue Service. They're out to get all my money.
John Tripolsky:You know, I wouldn't really say uncomfortable. When I was standing there talking to you guys, I kinda felt like I was at a mister Clean convention. You know, it was, it was very interesting. But
Chris Picciurro:well, I'll take it because Mr. Clean is a
John Tripolsky:great company. So he's a studly guy, and he cleans crap up. So on that note Well,
Chris Picciurro:I don't know about cleaning things. Thinking of cleaning up cleaning up accounting records sometimes when they're messy, our our team does that. IRS data book. This is so let's talk about the IRS. John, we had an episode where we were talking about quarterly tax payments and extensions and how it's weird the IRS calendar.
Chris Picciurro:I don't know if you remember that. But what's important to understand is the the federal government's fiscal year end is September 30th. That's why these wacky quarterly payments are October, January, April, and September. They want that 4th quarter payment on the books before they wrap up their fiscal year end. So with the IRS being part of the federal government, their fiscal year end is also September 30th.
Chris Picciurro:So right about this time of year, they issue their data book, which is an amazing resource. I bet and, yeah, it's 94 pages. Couple couple fluff pages in there. So that not necessarily the most light reading. Although, John, I I bet your dad woulda liked this book.
Chris Picciurro:I don't know why.
John Tripolsky:He would love it. He would love it. But you got
Chris Picciurro:a bunch of graphs and and borderline spreadsheets. So
John Tripolsky:And I have to be honest. I haven't seen one of these from many years prior, but I'm sure, you know, as time has passed, I think it's safe to say that this data book has probably been modernized graphically in a sense. Right? I'm I'm sure 10 years ago, this thing looked like it was spit out of a DOS program or, you know, Lotus Notes or something like that.
Chris Picciurro:Yeah. It was probably not the most fun to read, but it is on the IRS website. It's gonna be on the show notes. But what one thing that tax professionals, we have to understand, and taxpayers, you need to be leaning on your tax professionals, is that part of teaching tax flow, we have 3 laws. One of them that we sometimes don't talk about enough is that but we do talk about it sometimes.
Chris Picciurro:Tax agencies are your involuntary business partner. So the cool thing is if if you think about a football game, each football team has their own playbook. This is your opponent's playbook. We get access to it. This is an open note test you're taking, people.
Chris Picciurro:So understand what's in this data book because this if you read through this, this is gonna tell you where the IRS enforcement areas are, how many returns are filed, what they're looking at revenue wise. And, again, you know, figuring out the IRS, yeah, they they are our involuntary business partner, but but you also have to understand what they're what they're looking at. So in the first part of today's, podcast, we're gonna talk about just returns filed. So remember, this is from the fiscal year for the IRS, so the 12 months ending September 30, 2023. And, the IRS is a very is a very busy organization.
Chris Picciurro:They processed about 271,000,000 tax returns on supplemental documents. That is a ton of tax returns. So 271,000,000 of those. Out of those, 213,000,000 were filed electronically. So over 3 quarters of these returns were filed electronically.
Chris Picciurro:Now these returns include, individual returns, employment tax returns for your 9 40 ones, your w twos, your business returns, so your corporation, your s corp, your partnerships, and then the state gift tax exempt organizations. But 3 quarters of the returns are filed electronically. And interestingly enough, 9 over 90% of individual returns were filed electronically. So IRS, in their eyes, and I agree, are succeeding considering that 90% of individual returns, which makes up about a 150,000,000 of the 271,000,000 returns are filed electronically.
John Tripolsky:And, Chris, a question for you. So I I agree with you a 100%. I think that is a huge win on the proverbial scoreboard for the IRS just getting, you know, the population to migrate towards the we'll call it a com comfortability with electronically falling. I mean, I'm sure my dad went kicking and screaming. I'm sure he still does every year.
John Tripolsky:I love that guy by the way. He deals with me, But here's a question for you too. I mean, do you foresee it somewhere in the semi near future where the IRS will just say, hey, we're not accepting anything that's not electronically filed, or do you kinda see that maybe always being a thing? And, you know, what what do maybe some of those old fashioned paper ones look like? Do you are are taxpayers required to mail in certain types of those, say, amended returns or anything like that?
John Tripolsky:Or
Chris Picciurro:Yeah. The so it's nice now that amended returns just over the last year and a half or so. Now we can file on the personal side electronically before they had to be mailed in. Some returns have to be mailed in. I don't I think it would probably take a federal law to require a return to be filed electronically.
Chris Picciurro:So the I r but what the IRS is doing is because of the delays in processing paper returns and refunds, they're forcing people to file electronically without making them file electronically, if that makes sense. Right. So here's an interesting one though, John. Now we know that we talk about certain states quite a bit, in the in on this podcast. We talk about state income tax.
Chris Picciurro:But the IRS there are 3 states that topped the IRS collections for most tax before issuing refunds. So what states in the country are paying the most federal tax? I'm ready for my drum roll.
John Tripolsky:I think I have no drum roll.
Chris Picciurro:Oh. Your drum rolls on this podcast.
John Tripolsky:We should. You know what? Here. We'll we'll take a little pause here, and, you know, we'll edit 1 in editing. So 3, 2, 1.
Chris Picciurro:Okay. There's your drum roll. There you go. Awesome. So here they are.
Chris Picciurro:California, your best friend, New York, and Texas. Those 3 states paid the most amount of federal tax. So very interesting. Very, very interesting statistics. Now, so electronically filed returns are on the rise.
Chris Picciurro:We have out of the individual tax returns. So let's talk about the 163,000,000 individual tax returns. Okay? About half of them were were filed by practitioners, so paid professionals online. Pretty much paid professionals have to file online.
Chris Picciurro:So 50% of the individual returns of the 163,000,000 individual returns are filed by paid practitioners. A little over 50%. 15,000,000, remember we said about less than 10% were filed via paper. Only 3,000,000 were filed online using a free file. I found that interesting.
Chris Picciurro:I thought that would be a lot more. The IRS does have some free e file opportunities right on their website, And then their other online filed is 61,200,000. What does that mean? Those are your self prepared. So very, very interesting that you've got 85,000,000 practitioner online filed, other online filed, which would mean someone using some type of self, self prepared software, 61,000,000.
Chris Picciurro:And, but I would say that's a win for the IRS to have over 90% of tax returns electronically filed. Absolutely. Heck, yeah.
John Tripolsky:I mean, that just think about the number of trees that they're saving for for lack
Chris Picciurro:of better terms. Right? Think about yeah. There there's so many
John Tripolsky:The postal service is probably pissed. But, you know, it it is what it is.
Chris Picciurro:That's true. Gosh. I wonder how much revenue the postal service has lost over the last 20 years by not not having returns filed. So I
John Tripolsky:mean, heck. Think about it. Right? Let's say everybody did it on paper. We'll we'll call it a a dollar to mail in, which it's probably more than that because you're probably mailing a the packet in a sense.
John Tripolsky:I mean, that's over $200,000,000.
Chris Picciurro:Mhmm. Right? Exactly. I I agree. Now the IRS, is requesting additional funding to service their taxpayers.
Chris Picciurro:So part second part of this that we wanna talk about today are there's something called the the, you know, taxpayer bill of rights and the taxpayer advocate service, which is an independent organization within the IRS. We've had people go to that advocacy. Actually, John, not to get personal, but I believe you've had a run-in with the in in a positive way. Yeah. It was.
Chris Picciurro:Advocate server.
John Tripolsky:And if anybody, you would so one thing, Chris, that I was really surprised of that. A, it was I didn't even know they existed. Right? And, I mean, we were without going into a massive amount of detail, we were just trying to make a simple change where there was a a boo boo that was made, really on their end because they said it what whatever. They said they didn't receive it.
John Tripolsky:Back to the paper trail, that's a that's a great example. Right? When you mail something and they say they don't get it. But, yeah, the that advocate service, I was so surprised how efficient they were with one thing, but also it was you know, once once I got connected with them, again, not even knowing that they existed, that was I mean, I wish they had, like, classes and courses for companies that run as efficient as, won't say your last name, but I believe it was Karen out of Detroit. Fantastic.
John Tripolsky:That's right. Yeah. It was really good. They're very helpful. And and it's not like, you know, you're stuck in a corner with them.
John Tripolsky:Really, they I mean, I felt that they were truly on my side. They're like, let me let me get a solution for this. You know, they have they have our ear, but it was great. So
Chris Picciurro:Yeah. The IRS I mean, the the challenge is is we is especially there's a there's a bat line I call. There's a paid practitioner line for the IRS as CPAs, enrolled agents that we can call. And and you have to identify yourself. You have to tell them what your PTIN number is, and they have to verify you and you get get but even there, we would you know, there's practitioners that will wait on hold for for an hour, hour and a half, and then the call just gets dumped.
Chris Picciurro:So the IRS knows that's a problem, and they are working to try to get those lead times as as as short as possible. Service to taxpayers, John, here's interesting. How many without looking at the report, how many IRS website, page views do you think they had in the fiscal year?
John Tripolsky:Oh, alright. I'm I'm really not looking at it. I promise.
Chris Picciurro:Page views. Man. Iraps dotgov.
John Tripolsky:I'm just I'm just guessing. We're gonna say
Chris Picciurro:100,000,000? No. Over 3 and a half 1000000000.
John Tripolsky:Holy cow. Okay. Alright. That's a lot of refresh button.
Chris Picciurro:That's a lot. Yeah. So imagine. Anyway, they are they are, they are slammed. They are trying to catch up with cases.
Chris Picciurro:I mean, the pandemic put the IRS behind almost a full year. And, you know, we try but it's frustrating for clients. Right? Because our like, I can't tell you how many letters that our clients receive on our private CPA practice when we're trying to resolve an IRS issue that basically says IRS is saying, hey. We know you've got an issue.
Chris Picciurro:We'll get to it in the next 60 days. And then they get another letter, you know. So it's frustrating. Now I would say if you if you owed a refund or have any type of correspondence or case going with IRS and you are found to be correct, they will pay you interest on that balance due. So that's that's the positive.
John Tripolsky:The number of patriots, though, honestly, I mean, that's kind of another kudos to the IRS as as an organization in a sense because if they're getting that much traffic, that must well, it could go either way. Right? That must mean that they either, a, have a lot of resources that people know they can find, or they have a lot of resources that people can't find, and they spend a lot of time searching for them. So either way of it, I mean, I think that goes hand in hand and and really a direct correlation with the number of people that are comfortable or or just frankly submitting electronically. Now they're, you know, maybe going to I mean, not bypassing their CPA or their tax pro at all, but maybe they're doing a little bit more kind of self, discovery.
John Tripolsky:So a little bit more research on their end, which is great, my opinion.
Chris Picciurro:Yes. I mean, they they know there's an issue, but, again, they they I was very fortunate to be on the Intuit tax council for a few years. I think it was, like, 20 oh, gosh. I don't have my I don't have my nice plaque out that they gave me. I appreciate it, though.
Chris Picciurro:Like, 2017 to 2020. But part of that, we got to go to Washington, DC. We got to meet with the leadership within the IRS. And part of the issue is their software is so old. Their platform's so old.
Chris Picciurro:They've gotta concern themselves with data security. Changing that juggernaut is a massive undertaking. And constantly with with all these returns getting filed, it's challenging. But probably the thing that most listeners are are interested in and why they tuned in other to hear about our kids' travel baseball teams and how how nice your hair is, the compliance present of the I presence of the IRS. Who is the IRS auditing?
Chris Picciurro:What are they doing to enforce? Remember, IRS is a collection agency of tax for tax. So they have field examinations, meaning, hey. I, you know, that's like what you would call an in person audit. Okay?
Chris Picciurro:They have correspondence examinations. That means we're auditing you. Here's a letter. Submit all your stuff to us, and we and we'll human will look at it. And they have under automated under reporting notices.
Chris Picciurro:A lot of those are called CP 2 1000s where it says, hey, John. We see that you, you forgot to pay tax on this 10.99, and and here's the tax and, you know, and maybe they're right, so you you just pay it. And then they have some automated substitute for return in revenue. That's such a small amount, but the, the IRS really generates most of its tax assessments and revenue from field examinations.
John Tripolsky:Hey, Chris. I'm gonna quote, Andrew Pulo. So he's been a guest a couple times with us here on the podcast where we're really I think, you know, the first one, I believe we, referred to the IRS as Darth Vader. And Andrew is probably, you know, obviously, besides yourself, I think Andrew is probably the most in tune with the directly with the IRS, out of any person I've ever met. And I'm gonna quote him what I think he said, but maybe I'm adding a little bit of flare to it, earmuffs for the children.
John Tripolsky:But I think he referred to somebody that gets a c p 22,000 or 200 as just open the damn letter. Really? Just don't let it sit there. Just open it. It does you no good leaving the envelope sealed in your incoming mailbox on your kitchen counter when it's something easy that you can solve.
John Tripolsky:So that was a great episode we did.
Chris Picciurro:And so, yeah, Andrew is amazing. He's helped out with within teaching tax, so a lot of the people in the community. But understanding there are different types of examination. So let's take a look at some of the raw numbers the IRS has, displayed in their data book. So for the for tax returns basically for the last 8 years, tax years 2013 through 2021.
Chris Picciurro:Now remember, there's a statute of limitations of 3 years. So you're always looking back a year or 2, when we look at these these audit numbers. But for those tax years, the IRS examined less than a half percent of individual tax returns filed and less than 3 quarters of a percent of corporate returns filed. So your raw audit risk is technically 0.44% or 1 in 200. Alright?
Chris Picciurro:That
John Tripolsky:And that's actually a good number to hear because I know some people, at least ones that we talk to. Right? Individual taxpayers, business owners, the the fear of higher powers is put in them that they're gonna be audited. Right? So that right there is a very, surprisingly, a very small number.
John Tripolsky:Obviously, it probably has something to do with staffing as well on the IRS's side, but, like, you said it, your your audit risk is is pretty low. It all in all,
Chris Picciurro:it is. Now I do wanna throw a couple things out there. Tax year 2019 is the most recent year outside of our current statute of limitations, so that that's a really good number. The exam coverage rate for tax year 2019 for individual taxpayers with income of over $10,000,000, again, not a big percentage of people, was more than 11%. For taxpayers with $5,000,000 to or 5,000,000 to $10,000,000 of income was 3.1%.
Chris Picciurro:For taxpayers over, 1,000,000 up to $5,000,000 was 1.6%. So just to put it in perspective, once you get to a $1,000,000 worth of income, your audit risk triples just by raw numbers. Once you get to $5,000,000 of revenue, you're out up to 10,000,000, your audit risk is 6 times higher. And then once you get to over 10,000,000, your audit risk is 20 times higher than just a raw number. Now it's still a relatively small number, but that just gives you an idea of of those you know, what those percentages are.
Chris Picciurro:And we've had some really good podcast content on how to avoid an IRS audit before it's an audit. Right? Make sure you're reporting your income. Make sure you're tying out your transcripts and what's happening, addressing all the forms that you that you received. So
John Tripolsky:And, really, why do you think that may be I'm sure it's not a a known answer, but, you know, the the higher income. So say we're even talking, you know, that 1,000,001 to 5 and then, you know, 10 and over. Is it really do you think because they just look at that as, like, alright. We need to look at that more in-depth, or is it really just checking a lot of boxes when it comes to complexity naturally?
Chris Picciurro:Right. Obviously, the the the numbers are higher. So if you have someone, let's say, that has 10,000,000 $11,000,000 of net income and IRS disputes a a a $100,000 deduction, okay, that revenue would be probably about 34, not 35 to $40,000 of income for the IRS. If someone has a $100,000 worth of net of income and for some reason the IRS disputed a $30,000 deduction, there's not much juice in it for the IRS. There's not you know, now obviously if someone's self employed, that increases their audit risk as well, But but those are that's what IRS is looking at is, of course, they're gonna examine the the more the higher income taxpayers because there's more tax to, you know, to collect.
Chris Picciurro:It's a higher percentage. Your marginal tax rate is higher. Which ties directly into, you
John Tripolsky:know, what you mentioned again earlier in the show on this one specifically, you know, the IRS being your involuntary business partner. You know, that's it's pretty important to remember. Right? It's the internal revenue service, not the internal charity service. Like, they need to make money.
John Tripolsky:And as you know, we talk about this on almost every show or at least every other one. So people who've been listening to this now for well over a year probably tired of us saying this, but it's totally true that if you don't pick your tax, the IRS will, and they're not gonna pick it in your favor. So tax planning and strategy, all that puts all of the kinda all the chips on the table, but you're in control of them.
Chris Picciurro:So I would agree. And and when we look at in let's focus on individual income tax returns for the the 2013 to 2021 if we're looking at examination, percentage. Okay? In general, if you look at that period of time for all the returns filed, it's a very small percentage. If your income is a $100,000 or less, and let's say you're not self employed, your chance of getting examined is about 1 tenth of 1%.
Chris Picciurro:So there you you really gotta look at and, again, that doesn't give you a a you know, John, a lot of cars cars speed down next highway. You can't give everyone a speeding ticket, but you certainly don't wanna be the one getting you a speeding ticket.
John Tripolsky:Right. Wait. Like, you know, you stand out more if you slowed down at least in Michigan. Right? If the speed limit's 70 and you're doing, you know, 82 and everybody else is doing 90, you know, you look like the idiot.
John Tripolsky:They might pull you over. But anyways, anybody that's from Michigan will completely agree with that one. It's more dangerous to drive slow.
Chris Picciurro:And here's the other thing, talking about getting pulled over, I'm gonna close with this statistic. And when we you know, if you're listening to this, we don't work we wanna remember, legally and ethically reduce the tax you pay in your lifetime, we want you to file a compliant return, but we want you to file a return that you're paying as little tax as possible. Let's put a bow on this out of the the 2013 to 21 individual returns examined, okay, the total amount, 1,600,000 of those had a recommended additional tax. 50,000 of those had a no change. Right?
Chris Picciurro:So the point is your chance, if you get examined, of having a no change audit is very small. In fact, it's about 3%. So if you're getting audited, you're you're probably gonna get additional tax assessed. And that's 3% of the small portion. Exactly.
John Tripolsky:And not saying it would be a lot. Right? It might be something small. It might be, you know, something huge. Well, I know, Chris, this thing, as you mentioned too earlier on, 90 plus pages.
John Tripolsky:So if you are in the bathroom a lot, you know, print this off. Maybe you can do a page a day or something. Or if you're like, Chris, you already know this thing really page to page. But again, as we kind of opened up a little bit with, right, this is something that a lot of people, myself included until it was introduced to me by Chris, you don't even know exists. I mean, it's not like this is a secret either.
John Tripolsky:This is basically, you know, as they call it their their data book. I kinda look at it as more of, like, alright. It's an IRS fact sheet. It it hits all these numbers in there. It's actually laid out very, very nice and easy to follow.
John Tripolsky:So if you were interested in one section over the other one, you can see exactly where to go. It's a PDF. You can skip right through it. But I know, Chris, before we do wrap up here too, I imagine we're gonna revisit this multiple times throughout the year, either in sections or maybe we, you know, do another show here in a couple months or so, and and we hit in some little specific. But on that note too, if you are or if you do take a chance and you look at this data book, again, links in the show notes right there for you.
John Tripolsky:Breeze through it. If there's something that interests you more than something else, drop us a line. We'd love to explore a little bit more in-depth because it is it gets a little heavy in some areas or maybe you even just have a a question. I guarantee that we are more responsive than the IRS. So if you do have a question on this, ask us.
John Tripolsky:Drop it in our Facebook page, for teaching tax flow and defeating taxes at private Facebook group. You as a listener are always invited to join in there as well or shoot us an email. Either or, we'd be happy to explore some topics. So as we close out with, as always, next week, same time, different topic here on the Teaching Tax Flow podcast. Hey, everybody.
John Tripolsky:Johnny here from the Teaching Tax Flow team still here. Hopefully, you found this show a little bit more interesting than all the numbers that are probably laid out in that IRS data book. But I'll keep it short and sweet to wrap this up even more. Again, please take a look at any of the offerings or any I shouldn't say offerings. Any of the statistics, any of those numbers that are in that book, and drop us a line.
Disclaimer:Again, we'd love to look at them with you. It's not saying you have to go on Facebook, put your name, put your business, put everything out there, but again, just shoot us a message, or you can even go on the page or in the private Facebook group and do it anonymously, if you did have a question. So as always, we always invite you to do so, and we will talk to everybody very soon. The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional.
Disclaimer:For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer. The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.
