Navigating IRS Audits: Essential Strategies for Business Preparedness

The IRS has recently increased its focus on auditing large businesses and high-income individuals. By 2026, the agency plans to nearly triple its audit rates for large corporations with assets exceeding $250 million. Partnerships with assets over $10 million will also experience a significant rise in audits, with rates expected to increase tenfold by the same year. This ramp-up in enforcement is part of the IRS’s broader strategy to address noncompliance among wealthier entities, a plan that is funded by the Inflation Reduction Act.

Despite the increased audit activity, individuals earning less than $400,000 annually are not expected to face additional scrutiny. Likewise, small businesses are unlikely to see a rise in audits in the near future. The IRS is concentrating its efforts on more complex returns for higher-wealth entities. For instance, one of the agency’s focus areas is taxpayers who use business aircraft for personal purposes. While the cost of acquiring and operating corporate planes can be deductible, personal use, such as vacation travel, is not.

Preparation Is Key

The most effective way to handle an IRS audit is to prepare well in advance. It’s important to maintain thorough and accurate documentation on an ongoing basis. This includes organizing invoices, bills, canceled checks, receipts, and other proof for all items reported on your tax returns. Having these records readily accessible can significantly reduce the stress of an audit.

Being aware of potential audit triggers is also helpful. Certain inconsistencies in your tax return may draw the IRS’s attention, including:

- Significant discrepancies between your current tax return and past filings,

- Gross profit margins or expenses that deviate from industry norms, and

- Incorrect or unusually high deductions.

Specific deductions, like auto and travel expenses, have strict recordkeeping requirements. Failing to comply with these rules could invite further scrutiny. Additionally, owner-employee salaries that are substantially higher or lower than industry standards, especially in corporations, may raise red flags.

How to Respond to an Audit

If your business is selected for an IRS audit, you’ll receive a notification by letter—never by phone. If you don’t respond to the letter, the IRS may follow up with a phone call. Keep in mind, unsolicited emails or text messages claiming to be from the IRS are likely scams, as the agency does not communicate through those channels.

Most audits are relatively simple and request that you mail receipts or other documentation to verify specific deductions. The more intensive field audit requires an in-person meeting with IRS auditors.

Once notified of an audit, you will be informed of any discrepancies and given time to prepare. During this time, gather and organize all relevant financial records, and if any documents are missing, attempt to reconstruct the information from other sources.

Our firm is here to assist you throughout the audit process, including helping you:

- Understand the IRS’s concerns (which are not always clear),

- Collect the required documents and information, and

- Respond to the auditor’s inquiries effectively.

Generally, the IRS has three years to conduct an audit, often beginning a year or more after you file a return. If you receive an audit notice, it’s important to stay calm, as many audits are routine. By keeping detailed, organized, and accurate tax records, you can make the audit process smoother and even reduce the likelihood of being selected for an audit in the first place.