There's a persistent rumor that the IRS has stopped working. It hasn't! Staffing is down — by our estimate the agency is operating at roughly 15% less capacity than it was during the Biden years — but the people who are still there are working cases, and they're working them methodically. With federal deficits running around $2 trillion a year, the Treasury needs collections to hold up. The bond market is watching. The IRS isn't going quiet.
Here's what we're actually seeing across our desk this month.
On the Audit Side
Live audits are happening. These aren't just correspondence exams. We've handled S corporation audits and individual income tax audits this year where a real examiner is asking real questions and wants real documentation.
Red flags still draw attention. The classics haven't changed:
- Large losses, particularly losses that repeat year over year
- Aggressive or outsized depreciation, including bonus depreciation and Section 179 on vehicles and equipment
- Deductions that are large relative to reported income
None of these are automatically wrong. But if you claimed them, you need the substantiation to back them up — mileage logs, receipts, business-purpose documentation, basis records. Winning an audit is mostly a paperwork exercise decided long before the audit letter arrives.
S corporations are getting looked at, sometimes for no particular reason. Some of the S corp exams we've seen aren't red-flag-driven at all. The IRS is simply checking whether the entity is following the rules. That means reasonable compensation, proper basis tracking, accountable plans for reimbursements, and clean separation between the corporation and the owner's personal finances.
If you own an S corp and you're profitable, get on payroll. This is the single most common exposure we see. An S corp owner performing services for the company is required to take reasonable W-2 compensation. Distributions alone won't fly. If you're pulling meaningful profit out of the business and you've never run a paycheck, you have a problem waiting to be found — and the fix in an exam is worse than the fix now: reclassified wages, employment taxes, penalties, and interest.
CP2000 letters run year-round, all day, every day. The CP2000 is not an audit. It's the IRS computer matching what third parties reported against what showed up on your return. When the numbers don't line up, a notice generates automatically. That system never took a staffing hit.
The RSU problem is the one we see most. If your tech employer issued restricted stock units and shares were sold — including shares sold automatically to cover withholding — the broker reported gross proceeds on a Form 1099-B. Very often the cost basis is reported as zero or not reported at all, because the basis is the fair market value at vest, which already ran through your W-2.
If you don't report that sale on Schedule D and Form 8949 with the correct basis, the computer treats the entire proceeds as gain. We've seen CP2000 notices proposing five and six figures of tax on stock sales where the actual gain was a few hundred dollars. The tax isn't real, but the notice is, and if you ignore it, the assessment becomes real.
On the Collection Side
The IRS levies people who don't cooperate. That's the through-line. Almost every levy we unwind traces back to unanswered mail.
Automated Collection System levies follow the LT11. The LT11 (and its cousin, the Letter 1058) is the Final Notice of Intent to Levy and Notice of Your Right to a Hearing. It starts a 30-day clock. Ignore it and the machine proceeds — bank accounts, wages, accounts receivable.
Here's the part most people don't know: the levy determination often sits on your transcript for months before anything actually happens. The account will show the notice issued and the case in an active levy posture long before a bank account gets frozen. That gap is opportunity, and it's a large part of why clients hire us to pull and read transcripts. Knowing that a final notice went out eight months ago — to an old address, to a spouse, to a business location you closed — changes everything about how you approach the case. You can't respond to a threat you don't know exists.
Revenue officers are being assigned to cases, especially payroll tax cases. Employment tax is where the IRS applies its human capital first, and for good reason: it's trust fund money, withheld from employees and never remitted. We see revenue officers on income tax cases too, but payroll is the priority.
If you owe payroll taxes, check the Trust Fund Recovery Penalty statute. The IRS generally has three years to assess the TFRP against responsible individuals personally under Section 6672, measured from when the applicable Form 941 was filed (with returns filed early treated as filed on the statutory due date). Whether that window is open, closing, or already closed should shape your entire strategy — including whether to sign an extension, how to time an offer or installment agreement, and how a Form 4180 interview gets handled. Too many business owners negotiate a company-level resolution without ever checking their personal exposure.
The Takeaway
A smaller IRS is not a passive IRS. It's a more selective one — and the selections it's making run toward automated matching notices that require no staff at all, and toward payroll tax cases where the dollars are large and the legal hooks are strong. Meanwhile, the exam function is alive and asking questions about losses, depreciation, and S corp compliance.
If you have unfiled returns, unpaid balances, or a notice sitting in a drawer, this is not the year to wait it out! The mail keeps coming, and the transcript remembers everything.
Washington Tax Services (WATAX) has represented taxpayers before the IRS since 1989. If you're facing an audit, a CP2000 notice, a levy, or a payroll tax case, we can pull your transcripts and tell you exactly where you stand.
