The IRS has recently increased its audit efforts, particularly targeting large businesses and high-income individuals. By 2026, audit rates for large corporations with assets over $250 million will nearly triple, while partnerships with assets exceeding $10 million will experience a tenfold increase in audits. This surge in audit activity is fueled by the Inflation Reduction Act, with a clear focus on addressing high-dollar noncompliance and wealthier entities.
While small businesses and individuals making less than $400,000 annually are unlikely to see a significant uptick in audits, the IRS is concentrating on more complex returns. For example, one focal point includes taxpayers who use business aircraft for personal purposes—while businesses can deduct expenses for corporate planes, non-business travel isn’t tax-deductible.
How to Prepare for an IRS Audit
The best way to navigate an IRS audit is to be prepared well in advance. Here are some critical steps your business can take to safeguard itself:
- Maintain Accurate Records
Keep organized documentation of all business transactions, including invoices, bills, canceled checks, and receipts. Properly maintaining these records will serve as vital proof for items reported on your tax returns. - Know Common Red Flags
Certain entries on your tax returns may trigger scrutiny. Be mindful of potential red flags such as:- Significant inconsistencies between previous returns and your latest filing.
- Gross profit margins or expenses that differ dramatically from others in your industry.
- Miscalculations or unusually high deductions that stand out to auditors.
Pay particular attention to deductions with strict recordkeeping requirements, like auto and travel expenses. Additionally, owner-employee salaries that are out of sync with similar businesses can attract attention, especially for corporations.
- Stay Proactive
Regularly review your business’s tax filings to ensure accuracy and compliance. By identifying discrepancies early, you can address issues before the IRS flags them for an audit.
How to Respond to an IRS Audit
If the IRS selects your business for an audit, you’ll be notified by letter. Contrary to some scams, the IRS does not initiate audits over the phone, email, or text message. Here’s how to handle the situation if you receive a legitimate audit notice:
- Stay Calm
Many audits are routine, and not all require face-to-face meetings with an auditor. In fact, some audits may only request that you mail in supporting documentation for specific deductions. - Gather Your Documentation
Once notified, collect and organize all relevant financial records to support the information on your tax return. If some documents are missing, attempt to recreate them using other supporting evidence. - Understand the Discrepancies
The IRS will outline the specific items it is questioning. Be sure to understand exactly what is being disputed before responding. - Respond to the Audit Properly
If an in-person audit is required, ensure that all necessary documents are in order and ready to be reviewed. For mail-in audits, send the requested documentation promptly. Ignoring notices can result in further IRS actions.
How Our Firm Can Help
Facing an IRS audit can be overwhelming, but you don’t have to go through it alone. Our team can assist in:
- Clarifying what the IRS is disputing (sometimes it’s not entirely clear),
- Gathering the necessary documents and information to support your case,
- Preparing the most effective response to the IRS inquiries.
Remember, the IRS typically has three years from the date of filing to audit your returns. By taking a proactive, organized approach to your tax filings, you can mitigate the chances of being audited in the first place and make the process more manageable if it does occur.
By implementing these best practices, your business will be well-prepared to navigate an IRS audit with confidence and minimize potential disruptions. Don’t wait until an audit happens—proactive preparation is key to safeguarding your business. If you need expert guidance or assistance with your tax documentation, our team is here to help. Contact us today to ensure your business is fully equipped to handle any IRS audit with ease.
Q&As
How can businesses prepare for an IRS audit?
To prepare for an IRS audit, businesses should maintain detailed and organized documentation of all financial activities. This includes keeping invoices, receipts, bills, and other proof of expenses in one central location. It’s also essential to be aware of common audit triggers, such as significant inconsistencies in returns, unusually high deductions, or financials that differ greatly from industry standards.
What are some red flags that might lead to an audit?
Certain tax return entries can attract IRS scrutiny, including significant differences between past returns and the most current one, gross profit margins or expenses that are out of line with other businesses in the industry, and high or miscalculated deductions. Specific deductions, like auto and travel expenses, often require strict documentation, and salary discrepancies for owner-employees in corporations may also raise red flags.
What should you do if the IRS notifies you of an audit?
If selected for an audit, the IRS will notify you by letter. It’s important to respond promptly, gather the necessary documentation, and stay calm. Many audits simply request documentation by mail, while more thorough audits may require in-person meetings. The IRS will provide time to collect all relevant records, and if anything is missing, you’ll need to reconstruct the information accurately from available sources.
How can a CPA firm help you during an IRS audit?
A CPA firm can assist by helping you understand what the IRS is disputing, gathering the specific documents and information needed to support your case, and responding effectively to the IRS’s inquiries. Having professional support can make the process more manageable and ensure that all responses are timely and accurate.
