The IRS’s New Audit Strategy: What Wealthy Individuals, Corporations, and Complex Partnerships Need to Know

06 Jun 2024 The IRS’s New Audit Strategy: What Wealthy Individuals, Corporations, and Complex Partnerships Need to Know

The IRS’s newly unveiled strategic operating plan is set to reshape the landscape for wealthy individuals, large corporations, and complex partnerships. By 2026, audit rates for these groups are projected to rise significantly.

It’s important to understand and prepare for a more rigorous audit environment to safeguard your financial interests and ensure compliance with the evolving standards. In this article, we’ll provide insights and strategies to manage the impending changes.

Breaking down the IRS’s new audit plan

The strategic operating plan reflects the IRS’s enhanced capacity, driven by increased funding and resources, to address historically low audit rates among the wealthy. Here are the key points of the plan:

Wealthy individuals with income over $10 million

By 2026, individuals with income exceeding $10 million will experience a 50% increase in audit rates. While this sounds substantial, it’s important to note that the current audit rate for this group is relatively low. In 2019, only 11% of wealthy individuals faced audits. Under the new plan, this rate will rise to 16.5%, reflecting the IRS’s intensified focus on high-income earners who may have complex tax situations.

Large corporations with assets over $250 million

Large corporations are set to face a threefold increase in audits by 2026. Companies with assets exceeding $250 million will see their audit rates rise dramatically from 8.8% in 2019 to 22.6% in 2026. This shift underscores the IRS’s commitment to ensuring that large entities adhere to tax laws and accurately report their financial activities.

Complex partnerships with assets over $10 million

Complex partnerships are also on the IRS’s radar, with audit rates expected to increase tenfold by 2026. Partnerships with assets over $10 million will see their audit rates jump from a mere 0.1% in 2019 to 1% in 2026.

While these projected increases may seem daunting, it’s crucial to recognize that they come after years of relatively low audit activity due to budget constraints and limited manpower. The IRS’s enhanced resources now allow it to more effectively target these groups, ensuring compliance and closing the tax gap. Understanding these changes and preparing accordingly will be essential for those affected.

Actionable steps for those facing increased audit rates

With the IRS’s strategic plan set to increase audit rates, it’s crucial for those in the targeted groups to take proactive measures to mitigate audit risks. While these steps are not exhaustive or individualized, they offer a solid starting point for those facing increased audit risks:

• Maintain thorough documentation. Ensure all income, deductions, and credits are well-documented. Keep meticulous records of all financial transactions and supporting documents.

• Review past returns. Conduct a thorough review of past tax returns to identify and correct any potential errors or omissions. This can help prevent issues during an audit.

• Conduct internal audits. Businesses should regularly perform internal audits to ensure compliance with tax laws and regulations. This can help identify and rectify any discrepancies before an IRS audit.

• Implement robust accounting systems. Invest in advanced accounting and reporting systems to ensure accurate and transparent financial records. This will make it easier to provide necessary documentation during an audit.

• Stay informed on tax law changes. Keep abreast of changes in tax laws and regulations that may affect you or your business. Ensure your tax strategies are aligned with current laws to avoid potential issues.

• Regularly review partnership agreements. Ensure that partnership agreements are up-to-date and clearly define each partner’s responsibilities and tax obligations. This can help prevent disputes and confusion during an audit.

• Respond promptly to IRS inquiries. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive any notices or inquiries from the IRS, contact our office for help with a response.

Preparing for the future

This article provides a brief overview of the upcoming changes in the IRS’s strategic operating plan and outlines some basic steps to consider. It is important to note that these recommendations are not exhaustive. For personalized advice and comprehensive guidance, please contact our office.

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