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IRS audit efforts on the rise: What small businesses should know

The IRS has been ramping up its audit efforts, targeting large corporations and high-income individuals. By 2026, audit rates for corporations with over $250 million in assets are set to nearly triple. Additionally, partnerships with assets above $10 million will face a tenfold increase in audits. This initiative, funded by the Inflation Reduction Act, is part of a broader IRS strategy to focus on wealthier entities and noncompliant high-dollar returns.

Are Small Businesses Affected?

For most small businesses and individuals earning less than $400,000, audit rates are unlikely to increase. The IRS’s priority remains on more complex returns involving wealthier taxpayers. For instance, taxpayers who use business aircraft for personal travel are under added scrutiny, as only business-related flights can be deducted.

How to Be Audit-Ready

The best defense in an audit is thorough preparation. Keep detailed records of all business expenses, including invoices, bills, receipts, and canceled checks. Here are some potential audit triggers to watch out for:

• Inconsistencies in reporting between past and current tax returns.
• Profit margins or expenses that vary significantly from industry averages.
• Large deductions that don’t align with IRS requirements, like auto and travel expenses.

Unusual salary levels for owner-employees in corporations may also raise flags, particularly if these vary widely from similar roles in the area.

If You’re Selected for an Audit

If you’re chosen for an audit, expect a formal letter notification. (The IRS typically doesn’t make initial contact by phone.) Often, audits simply request specific documents by mail to verify deductions. However, in some cases, a meeting with IRS auditors, known as a field audit, may be necessary. Keep in mind that unsolicited audit emails or texts are scams; ignore them.

The IRS usually allows time to gather and organize records. If anything is missing, try to reconstruct the data as accurately as possible from other records.

How We Can Help

If you’re facing an audit, we can support you by:

• Helping you understand what’s under review,
• Gathering the right documentation, and
• Effectively responding to IRS inquiries.

The IRS generally has up to three years to conduct an audit, often waiting a year or more after a return is filed to begin. Staying organized and proactive with your tax records can make the process smoother—and may even reduce the chance of an audit in the first place.