The IRS audited more than 500K returns, and yours could be next

The IRS audited 505,514 of roughly 266 million returns in fiscal 2024 (≈0.19%), with dramatically higher exam rates for the very wealthy (11% for $10M+). Most audits (77.9%) were correspondence (mail) reviews; major red flags include mismatched third-party income, large disproportionate deductions, repeated Schedule C losses, aggressive home-office claims, and unreported crypto (noting new Form 1099-DA reporting for 2025). The IRS uses DIF scoring and growing machine‑learning tools to target anomalies, and statutes of limitations are generally three years (six years for substantial underreporting).

Analysis

Wider third‑party reporting (payment platforms, brokers, crypto 1099s) meaningfully shifts information asymmetry in the IRS’s favor; that doesn’t just raise audit hit rates, it changes economics across two markets simultaneously — tax compliance services (demand up, higher ARPU) and gig/marketplace labor supply (net pay down unless platforms intervene). Expect a concentrated increase in dispute work and protracted appeals for high‑net‑worth filers and complex digital‑asset transactions, which benefits firms that sell audit‑defense and data‑reconciliation tooling.

For gig platforms the second‑order margin impact is underappreciated: if more driver receipts are matched and underreported income is remedied, driver after‑tax take rates fall by an amount roughly equal to the marginal tax + self‑employment tax hit (~5–12% for many drivers). Platforms will likely raise incentives or reduce effective take rates for the company within 3–9 months to maintain supply, pressuring segment margins and driving up promotional spend per ride/order.

Winners include tax software, payroll, and compliance data vendors that can productize automated reconciliation (capture, normalize, and produce audit‑ready packets); boutique tax litigation specialists and Big Four advisory practices should see outsized pricing power for representation. Crypto custodians and regulated exchanges also pick up volume and KYC value from clearer reporting regimes — but they also shoulder compliance cost increases that could be passed to customers or compress spreads.

Key risk/catalysts: timing is lumpy — 2025 reporting changes frontload data but enforcement outcomes play out over 6–36 months as appeals and IRS staffing/capacity oscillate with congressional budgets and litigation. Reversal scenarios include meaningful IRS budget cuts, successful legal challenges to new reporting forms, or a macro slowdown that reprioritizes enforcement away from civil audits toward criminal/large‑entity cases.

Key Decisions for Investors

• Long INTU (12 months): Buy shares or 12–18 month call spreads. Thesis: recurring subscription + ProConnect and Snapshot tools capture increased demand for automated tax reconciliation and audit defense. Target upside 15–30%; downside 10% (set 8% stop). Catalysts: pre‑tax‑season subscription growth and product uptake metrics.
• Long HRB (6–12 months): Purchase shares or enter a call spread into next tax season. Thesis: retail taxpayers and DIY filers drive outsized incremental revenue from paid assistance and representation as correspondence audits rise. Reward: 20%+ implied seasonal lift; Risk: 15% downside if market rotates away from consumer services.
• Pair trade — Short UBER / Long INTU (3–9 months): Short UBER equity or buy a 6–9 month put spread while maintaining a long INTU exposure. Thesis: tighter reporting reduces driver net pay → higher incentive spend and margin compression at UBER; INTU benefits from higher demand. Target asymmetric payoff: UBER downside 20% vs INTU upside 15%. Manage with 10% portfolio allocation max.
• Long COIN (9–12 months) conditional: Buy calls or buy‑write into dips. Thesis: mandatory 1099‑DA increases trade visibility and may boost exchange flow and custody demand; non‑linear upside if retail activity increases. Risk: regulatory rulings or crypto bear market; cap position size and use spreads to limit theta decay.