As the IRS gears up for an intensified crackdown on tax compliance, taxpayers must brace themselves for a potential surge in audits. Understanding who might be targeted, preparing adequately for audits, and grasping the implications of increased scrutiny is vital for navigating this challenging terrain. Let’s delve into the key strategies to navigate the risks of increasing IRS audit activity.
Who Will Be the Focus of IRS Audit Resources?
The increased funding of $80 billion allocated to the Internal Revenue Service (IRS) in 2022, through legislation signed by President Joe Biden, has spurred significant changes in the agency’s approach to tax enforcement, as detailed by CBS News. This substantial infusion of resources aims to rectify staffing shortages that have led to delays and a decrease in audit activities.
IRS Commissioner Danny Werfel emphasized to CBS News that their focus isn’t directed towards auditing middle- or low-income individuals or small businesses. Instead, the agency is honing in on entities with complex financial structures and high net worth. Here’s an expanded breakdown of the IRS’s heightened audit targets:
- Big Corporations: The IRS is set to significantly increase its scrutiny of large corporations with assets exceeding $250 million. By 2026, the audit rate for these entities will triple from the 2019 rate of 8.8%.
- Complicated Partnerships: Partnerships boasting assets over $10 million will face heightened scrutiny from the IRS. Audit rates, which were previously negligible, are projected to rise to 1% by 2026.
- Wealthy Individuals: The IRS plans to ramp up audits on individuals earning over $10 million annually. Audit rates for this demographic are slated to climb from 11% to 16.5% by 2026.
These strategic shifts underscore the IRS’s intention to concentrate its resources where it anticipates encountering the most significant tax compliance issues. Consequently, individuals and entities falling within these targeted categories should prepare for heightened scrutiny and increased audit activity in the years ahead.
Key Steps for IRS Audits Preparation
Preparation is paramount when facing an IRS audit. Here are essential steps to navigate the process effectively:
- Thorough Documentation Collection: When gathering documentation, it’s crucial to ensure you have a comprehensive array of records. This includes not only income statements, receipts, bank statements, and tax forms but also any supporting documents relevant to deductions, credits, and other financial transactions. Organizing these documents in a clear and accessible manner can streamline the audit process and help you provide accurate information promptly.
- Qualified Professional Engagement: Choosing the right tax professional or IRS audit representation is essential. While questions like “How does an IRS audit work?” or “How does the IRS notify you of an audit?” may seem straightforward, it’s crucial to obtain the most accurate and reliable information available. Entrusting your tax affairs to seasoned professionals ensures you’re well-equipped to navigate the complexities of IRS audits with confidence.
- Thorough Review and Amendment: Conducting a meticulous review of your tax returns is fundamental. Look for any potential red flags, inconsistencies, or areas where the IRS might raise questions. If errors or discrepancies are identified, taking proactive steps to amend your returns demonstrates diligence and a commitment to accuracy. This can help minimize any penalties or interest that might accrue from unintentional mistakes.
- Timely and Cooperative Response: Promptly responding to IRS audit letters and requests is vital. Delays or incomplete responses could prolong the audit process and potentially raise suspicions. By providing requested information within the specified timeframe and cooperating fully with IRS auditors, you demonstrate a willingness to address their concerns transparently and facilitate a smoother resolution.
- Effective Communication: Maintaining open lines of communication throughout the audit is key. Be proactive in addressing any inquiries or concerns raised by the IRS auditor, and provide clear and concise explanations supported by documentation when necessary. Clear communication helps build trust and rapport, fostering a collaborative atmosphere that can lead to a more favorable outcome.
- Understanding Rights and Options: Educate yourself about your rights and options during an IRS audit. Knowing what to expect and how to navigate the process empowers you to make informed decisions and assert your rights effectively. If disagreements arise during the audit, understanding the appeals process and other recourse options can help protect your interests.
- Documentation Retention: Even after the audit is complete, it’s essential to retain all relevant documentation for an appropriate period. This includes not only the records provided during the audit but also any correspondence, notices, or agreements reached with the IRS. Maintaining a comprehensive audit trail can serve as valuable protection in case of future inquiries or disputes.
Implications of Increased Audits
The escalation in IRS audits carries significant implications for taxpayers and the broader tax landscape. Some notable consequences include:
- Operational Cost: The heightened scrutiny from increased audits places an additional operational cost on taxpayers, particularly businesses and high-net-worth individuals. Compliance efforts demand additional resources, time, and manpower to ensure that all financial records are accurate, comprehensive, and readily accessible for audit purposes.
- Legal Risks and Litigation: Audits raise the specter of legal risks and potential litigation for taxpayers. Disputes over tax liabilities, deductions, or other matters may escalate to formal proceedings, leading to costly legal battles and protracted courtroom battles. Navigating the complexities of tax law and presenting a compelling defense requires skilled legal representation, adding further expenses and uncertainties to the audit process.
- Market Perception and Investor Confidence: The outcomes of audits can influence market perception and investor confidence in publicly traded companies. Revelations of tax irregularities or non-compliance may trigger negative reactions from shareholders, analysts, and regulators, leading to stock price fluctuations, diminished market capitalization, and reputational damage. Transparent disclosure and proactive measures to address audit findings are essential for maintaining investor trust and preserving market credibility.
- Resource Allocation: Businesses may need to reassess resource allocation in response to increased audit activity. Allocating sufficient resources to tax compliance initiatives becomes a priority, necessitating adjustments to budgetary allocations, staffing levels, and operational priorities. Businesses may also incorporate contingency measures to mitigate audit-related risks and ensure business continuity in the face of potential financial penalties or legal challenges.
- Compliance Technology and Automation: The demand for advanced compliance technology and automation tools rises as organizations seek to streamline audit preparation and response processes. Investing in robust tax software, data analytics platforms, and workflow automation solutions can enhance efficiency, accuracy, and compliance with regulatory requirements. Leveraging technology enables proactive monitoring of tax-related risks, timely identification of discrepancies, and proactive remediation measures to mitigate audit exposure.
- Enhanced Regulatory Oversight and Enforcement: The escalation in audits reflects broader trends towards enhanced regulatory oversight and enforcement in the tax arena. Regulatory authorities are increasingly leveraging data analytics, artificial intelligence, and other advanced technologies to detect and deter tax evasion, fraud, and other forms of non-compliance. Taxpayers must adapt to this evolving regulatory landscape by embracing best practices in tax governance, risk management, and compliance culture.
- International Taxation Challenges: Multinational corporations face additional complexities and challenges in navigating increased audit scrutiny, particularly concerning international taxation issues. Transfer pricing arrangements, cross-border transactions, and tax treaties come under heightened scrutiny, necessitating robust documentation, intercompany agreements, and compliance with evolving regulatory requirements. Proactive engagement with tax professionals and alignment with international tax standards are essential for managing audit risks in a global business environment.
As taxpayers prepare for the increase in IRS audits, proactive measures and strategic planning are essential for navigating this challenging landscape. By preparing diligently and engaging professional representation when necessary, taxpayers can enhance their compliance posture and mitigate the risks associated with increased scrutiny.
Disputing with the IRS can be overwhelming, let our experts with 30 years of experience working with the IRS assist you.
We’re Here to Help
Bennett Thrasher’s tax controversy practice is ready to represent and assist you through the dispute process and address your tax audits. For more information, please contact James Pickett, Director of Tax Controversy, or call 770.396.2200.
