Prepare for the Upcoming Increase in IRS Audits
Written by: Kathy Herndon CPA, PFS, MST, CExP
The Internal Revenue Service (IRS) is ramping up its audit efforts, focusing on high-net-worth individuals, large corporations, and complex partnerships. This shift in scrutiny is fueled by an $80 billion boost from the Inflation Reduction Act (IRA) signed into law in August 2022. As the IRS gears up to intensify its audit activity, business owners and high-income earners must understand the landscape and take proactive steps to ensure audit readiness.
Areas of Focus for Increased IRS Audits
The IRS has identified several key areas where it will increase audit efforts by 2026:
- Big Corporations: Entities with assets exceeding $250 million will face significant scrutiny. Audit rates for these corporations are expected to triple from the 2019 rate of 8.8%.
- Complicated Partnerships: Audit rates for partnerships with assets over $10 million will rise from negligible levels to 1%.
- Wealthy Individuals: Audit rates for those earning over $10 million annually will increase from 11% to 16.5%.
- In contrast, audit rates for small businesses and individuals earning under $400,000 will not increase and will remain historically low.
Why the Increase in IRS Audits?
The $80 billion funding from the IRA is intended to bolster the IRS’s ability to enforce tax laws and ensure compliance among high-net-worth individuals and large entities. This funding aims to close the tax gap by targeting those most likely to engage in complex financial transactions and structures that could lead to underreporting or tax evasion.
Importance of Audit Readiness
Given the impending surge in IRS audits, it is more important than ever for business owners and high-income earners to be prepared. Here are some key steps to ensure you are audit-ready:
- Documentation and Receipts: Maintain thorough and organized records of all financial transactions. This includes keeping receipts, invoices, and other documentation that can substantiate your income and expenses.
- Regular Financial Reviews: Conduct regular reviews of your financial statements to ensure accuracy and compliance with tax laws. This proactive approach can help identify and address potential issues before they become problems.
- Minimize Risk: Avoid large, unexplained expenses in broad categories such as “travel” or “repairs and maintenance.” Instead, break these expenses into smaller, more specific categories on your tax returns.
If You Are Selected for an Audit
If you are selected for an audit, contact your accountant immediately. Our accounting firm can act as your liaison with the IRS, helping narrow the audit’s focus and ensure a quick resolution. By leveraging our expertise and understanding of what the IRS looks for, we take preventative measures when preparing returns to minimize the risk of an audit.
Our Approach to Minimizing IRS Audit Risk
At VSH CPA, we take a proactive approach to minimize the risk of IRS audits for our clients. We prepare returns with the IRS’s focus areas in mind, ensuring that all questions are answered and potential red flags are addressed. Our experienced team is equipped to handle communications with the IRS on your behalf, preventing the IRS from visiting your place of business and helping to achieve a swift resolution.
With the upcoming increase in IRS audits, it is crucial to be proactive and prepared. Ensuring meticulous documentation, conducting regular financial reviews, and strategically categorizing expenses can reduce your audit risk significantly. If selected for an audit, rely on your accountants to navigate the process and communicate with the IRS on your behalf.
Contact us today to learn how we can help you stay audit-ready and minimize your risk of an IRS audit. Our team is here to provide the expertise and support you need to protect your financial interests.
