The IRS has ramped up its enforcement efforts. If you’ve heard the buzz about new agents, AI-driven audits, and an increased focus on higher earners and small businesses, you might feel a little uneasy. But no need to panic—just plan and prepare. Here’s what’s happening and what you can do to stay ahead.
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Why is IRS enforcement increasing?
Years of budget cuts left the IRS underfunded and struggling to keep up with complex tax filings. That changed with funding from the Inflation Reduction Act (IRA), which allocated $60 billion to modernize the agency. Although some of that money has been clawed back, the IRS has already expanded its capabilities, hired more agents than originally planned, and invested heavily in AI to spot tax evasion patterns faster than ever.
The IRS has traditionally relied on humans to spot irregularities, but AI is shifting the landscape. With the help of AI, the agency processes billions of forms each year, cross-checks data in minutes, and flags discrepancies in ways humans couldn’t.
For example, in a recent win, AI identified schemes in which labor contractors were making IRS Form 1099 payments to nonexistent subcontractors and using shell corporations to funnel money back to themselves, allowing them to claim substantial fraudulent tax deductions.
Who’s in the IRS’ crosshairs?
The agency has said that it won’t boost its enforcement for people who earn less than $400,000 annually (the bulk of U.S. taxpayers). The initial focus is on high-income individuals and large businesses:
- Large corporations with assets exceeding $250 million will face a sharp increase in audit rates, climbing from 8.8% in 2019 to 22.6% by tax year 2026—a nearly threefold rise.
- Large partnerships holding more than $10 million in assets will experience a 10-fold increase in audit rates, from 0.1% in 2019 to 1% by tax year 2026.
- Wealthy individuals with total positive income above $10 million will see audit rates increase by 50%, rising from 11% in 2019 to 16.5% by tax year 2026.
Enforcement changes could also trickle down to smaller businesses thanks to the IRS merging its large and small business divisions, which may lead to more experienced agents scrutinizing smaller enterprises. That means small businesses can no longer assume they’ll fly under the radar.
Another area of increased focus is on gig workers. While employers file straightforward W-2s for their employees, independent contractors often claim deductions for expenses like mileage or equipment. AI tools are being used to flag deductions that seem out of line, like unusually high gas expenses for rideshare drivers.
What does increased IRS enforcement mean for small businesses?
Historically, IRS audits of smaller companies have been relatively rare. But the combination of improved technology and more skilled agents means the IRS could catch more mistakes or questionable tactics.
If you’re a business owner, now’s the time to get your house in order. The goal isn’t to live in fear of an audit. It’s about being prepared.
- Keep detailed records of income and expenses. Don’t rely on your bank statements; store receipts, invoices, and contracts to back up deductions.
- It’s tempting to push the limits with aggressive tax strategies, but now isn’t the time to test the IRS. Focus on legitimate deductions backed by solid evidence.
- Things like inconsistent reporting across forms, unusual deductions, or large charitable contributions without documentation can make your return stand out.
- If you think you’ve made a mistake in a past filing, consider amending your return before the IRS catches it.
- A qualified tax preparer or CPA can help you stay compliant and navigate an IRS audit if it arises.
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What’s next?
The IRS has a long way to go to meet its ambitious enforcement goals. For now, audits of millionaires and corporations are ramping up, while changes for smaller taxpayers and businesses are just beginning. We’ll be keeping an eye on these trends.
In the meantime, don’t let talk of audits keep you up at night. Stay informed, stay organized, and let our tax professionals help you stay on the right side of compliance.