IRS Audits to Increase for Wealthy Individuals & Large Partnerships

The Internal Revenue Service (IRS) is set to increase audit activities as part of its efforts to crack down on tax evasion and enhance revenue collection for the U.S. Treasury. However, according to IRS Commissioner Danny Werfel, this heightened scrutiny will not be applied uniformly across all taxpayer groups.

Bolstered by an $80 billion allocation from the Inflation Reduction Act (IRA), signed into law by President Biden in 2022, the IRS aims to revitalize its operations. Werfel said years of underfunding had left the agency struggling with customer service issues, processing delays, and a decline in audit rates. He says the new funding is a step in addressing these challenges and modernizing the IRS.

Enhanced customer service and digital transformation 

In a recent announcement, the IRS outlined its plans for utilizing the IRA funds. Significant progress has already been made in improving customer service. This year, the IRS managed to answer 1 million more calls than in the previous tax season. Additionally, enforcement efforts have been strengthened, resulting in the collection of $520 million from wealthy taxpayers who the IRS found either had not filed their taxes or owed money.

The agency is also focusing on digitizing its vast repository of 1 billion pieces of paper and enhancing its online tools. Improvements to the “Where’s My Refund” tool now allow taxpayers to receive real-time updates on their tax return status, aiming to make the filing process more transparent and efficient.

Focused audits & bolstered workforce 

Despite the overall increase in audits, Werfel assured that enforcement would not intensify for individuals earning less than $400,000 annually, which encompasses the majority of U.S. taxpayers. Instead, the IRS will concentrate its efforts on wealthy individuals, large partnerships and large corporations.

• Large Corporations: The IRS plans to triple audit rates for large corporations with assets exceeding $250 million. Audit rates for these entities will rise from 8.8% in 2019 to 22.6% by 2026.
• Large Partnerships: Partnerships with assets over $10 million will see their audit rates increase tenfold, from 0.1% in 2019 to 1% in 2026.
• Wealthy Individuals: Those with total positive income over $10 million will face a 50% increase in audit rates, from 11% in 2019 to 16.5% by 2026.

Despite these increases, audit rates will not surpass the levels seen in 2010, partly due to the growing complexity and number of filings by large corporations, partnerships, and high-income individuals.

The IRA funding is also being used to expand the IRS workforce, which had shrunk from over 100,000 employees in the mid-1990s to around 73,000 by 2019 due to retirements and budget cuts. Recently, the IRS has increased its workforce to about 90,000 full-time employees and plans to grow to approximately 102,500 in the coming years. Werfel noted that even this expanded workforce would still be below the agency’s peak numbers from the 1980s and early 1990s.

How business owners can prepare for increased IRS audits 

With the IRS ramping up audit activities, particularly targeting wealthy individuals, large partnerships and corporations, it’s crucial for business owners to be well-prepared. By taking proactive steps, you can ensure your business remains compliant and minimize potential disruptions. Here’s how:

• Keep Detailed Records: Maintaining meticulous records is essential for any business owner. Ensure all financial documents are organized and easily accessible:
• Income Documentation: Keep copies of all income forms, including invoices, receipts, and bank statements.
• Expense Receipts: Save receipts for deductible business expenses, such as supplies, travel, and office costs.
• Investment Records: Document stock transactions, dividends, and other investment-related activities.
• Proof of Deductions: Gather documentation to support all business deductions and credits.
• Work with a CPA or Tax Advisor: Especially if your business has complex financials. They can help you navigate tax laws and maximize deductions. Our team can provide recommendations. Contact us for more information.

As the IRS intensifies its focus on audits, business owners must ensure their tax filings are accurate and well-documented. By keeping detailed records, seeking professional help, and staying informed, you can navigate the evolving tax landscape confidently and minimize the risk of audit-related disruptions to your business. These proactive steps not only ensure compliance but also help maintain the smooth operation and growth of your business.

For additional information

If you have any questions, please contact our Payroll team at 210–293-6620, toll-free at 1–888–757–2104, or payroll@gbizadvisors.com.