The Internal Revenue Service (IRS) plans to carry out a notable increase in audits in the coming years. This initiative is a broader effort to enhance tax compliance and narrow the tax gap – the difference between taxes owed and taxes paid on time. Below we go over who the IRS plans to target during this surge.

The Impact of the Inflation Reduction Act

The Inflation Reduction Act of 2022, signed into law by President Biden, allocated $80 billion in additional funding to the IRS. This funding aims to address the agency’s longstanding issues, such as processing delays, reduced audit rates, and customer service challenges. With this increased funding, the IRS plans to significantly ramp up audits over the next three years.

High-Income Individuals Under Scrutiny

Individuals earning $400,000 or more per year will be a primary focus of the IRS’s increased efforts. This income group often has more complex tax returns, involving multiple income streams, substantial investments, and numerous deductions. The agency’s objective is to ensure that high-income earners are correctly reporting their income and paying the appropriate amount of taxes.

Large Corporations and Partnerships

Large corporations, especially those with assets exceeding $250 million, will see a significant increase in audit rates. The goal is to make sure large entities are adhering to tax laws and correctly reporting their financial activities. By the 2026 tax year, audit rates for these companies are expected to rise to 22.6%, up from 8.8% in 2019. Similarly, large partnerships with assets over $10 million will face increased audits, with rates projected to grow to 1% by 2026, up from 0.1% in 2019.

Small Business Audits

Although the IRS has reassured small businesses that they would not be affected by increased audits, small business owners still fear they might be targeted. In fact, Treasury Secretary Janet Yellen confirmed in March that the proportion of new audits targeting small businesses under the $400,000 threshold would remain the same, indicating that small businesses might still be under the microscope.

Cryptocurrency Transactions

The growing popularity of cryptocurrencies has caught the IRS’s attention. Taxpayers involved in digital currency transactions must report all income from these activities, including gains from sales, mining operations, and payments received in cryptocurrency. The IRS has been issuing warnings and is expected to increase audits in this area, imposing penalties on those who fail to comply with reporting requirements. It’s vital to keep detailed records of all cryptocurrency transactions.

Offshore Accounts and Foreign Assets

The IRS continues to focus on taxpayers with offshore accounts and foreign assets, areas ripe for significant tax evasion. Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers with foreign financial assets exceeding certain thresholds must report these assets. The agency’s increased funding will enable a more aggressive tracking of those hiding income assets overseas, and taxpayers who fail to comply with reporting requirements can receive hefty penalties.

Preparing for the Increased Audit Risk

In light of the IRS’s expanded focus, taxpayers must be sure their tax returns are accurate and adhere to all relevant laws. Maintaining comprehensive records and documentation is crucial in the case of an audit. Seeking advice from qualified tax professionals can also help mitigate risks and ensure proper tax reporting.