The IRS has stepped up its audit efforts, primarily focusing on large businesses and high-income individuals. By 2026, audit rates for large corporations with assets exceeding $250 million are set to nearly triple. Partnerships with assets over $10 million will also experience a tenfold increase in audit rates. This enhanced scrutiny is part of a broader strategy, funded by the Inflation Reduction Act, to target wealthier entities and address significant noncompliance issues.
Notably, the IRS does not plan to increase audits for individuals earning less than $400,000 annually. Similarly, small businesses are unlikely to see higher audit rates in the near term, as the IRS is prioritizing more complex returns from higher-wealth entities. For instance, one area of focus is taxpayers who personally use business aircraft. While businesses can deduct the cost of purchasing and maintaining corporate planes, personal trips, such as vacations, are not deductible.
Why Preparation Matters
The best way to handle an IRS audit is to be prepared well in advance. This means consistently maintaining organized records—such as invoices, bills, receipts, and other relevant documentation—to support all items reported on your tax returns. Storing everything in one place will make it easier to respond to audit inquiries, should they arise.
It’s also helpful to understand what might raise red flags with the IRS. Certain entries on tax returns are known to attract attention and could trigger an audit. These include:
- Significant discrepancies between past returns and your current one,
- A gross profit margin or expenses that differ significantly from other businesses in your industry, and
- Miscalculations or unusually high deductions.
Specific deductions, like those for auto and travel expenses, come with strict recordkeeping requirements and are often scrutinized. Additionally, salaries for owner-employees that are significantly higher or lower than the industry norm, particularly in corporate structures, could also prompt IRS questions.
How to Respond if You’re Audited
If your business is selected for an IRS audit, you’ll be notified via letter. The IRS typically does not initiate contact by phone. However, if you don’t respond to their letter, they may follow up with a phone call.
Many audits are relatively straightforward, asking for you to submit receipts or documentation by mail to verify certain deductions. Field audits, which require in-person meetings with IRS auditors, are the most detailed but less common. (As a reminder, ignore unsolicited emails or text messages claiming to be from the IRS about an audit, as these are likely scams—the IRS doesn’t use these methods for communication.)
The IRS generally allows time to respond to a notice and will specify which discrepancies are in question. You’ll need to gather and organize all relevant income and expense records. If any documents are missing, do your best to reconstruct the information using other available records.
If you are audited, our firm can assist by:
- Clarifying what specific issues the IRS is questioning,
- Helping gather the necessary documents and information, and
- Ensuring that your response to the audit is as effective and thorough as possible.
Keep in mind that the IRS usually has up to three years to conduct an audit, and the process may not begin until a year or more after you file your return. Stay calm if the IRS contacts you—many audits are routine. By keeping meticulous records and taking a proactive approach to managing your tax-related information, you can make an audit more manageable and potentially reduce your chances of being selected in the first place.
Be Audit-Ready with Expert Guidance
Facing an IRS audit can be stressful, but with the right preparation, you can approach it with confidence. Our experienced tax professionals are here to help you stay ahead, ensuring that your records are well-organized and your filings are accurate. Whether you’re preparing for a potential audit or responding to one, we provide the expertise and support you need to navigate the process smoothly.
Don’t wait until the IRS comes knocking—contact our firm today at (203) 925-9600 or email [email protected] to schedule a consultation and safeguard your business. We’re ready to help you prepare, respond, and protect your financial well-being.
