The IRS intends to use supplemental Inflation Reduction Act funding to significantly increase audit rates for large corporations, large and complex partnerships, and select individual taxpayers by the 2026 tax year following a decrease in audit rates in recent years due to lacking funding.

The plan also places major focus on the milestones and accomplishments aimed at improving the customer service experience, as well as initiatives to improve technology and taxpayer compliance.

Gain insights into the planned increases in audit rates, how Inflation Reduction Act funds enable the plan, and how taxpayers can use mock examinations to prepare for a potential audit.

Planned IRS Audit Rate Increases

The IRS plan provides for the following expected audit rate increases:

• Large corporations with over $250 million in assets. Rate tripling from 8.8% in 2019 to 22.6% by the 2026 tax year.
• Large, complex partnerships with assets over $10 million. Ten-fold increase in rates from 0.1% in 2019 to 1% by the 2026 tax year.
• Individuals with at least $10 million in income. Rate increase of 50% from 11% in 2019 to 16.5% by the 2026 tax year.

Even with these planned increases for large businesses and select individuals, the IRS continues to emphasize that audit rates will remain stable for businesses and taxpayers with income under $400,000 per year.

How Inflation Reduction Act Funds Enable Audit Rate Increase

After years of chronic underfunding, Inflation Reduction Act funds have allowed the IRS to hire more enforcement personnel, specifically, accountants, engineers, economists, data scientists, attorneys, and tax experts with specialized skills. This expertise is critical to examining large and complex business returns as well as the returns of wealthy individuals.

In terms of numbers, the enforcement staff at the IRS has increased by 4,000, bringing the total staff to 39,000, since the August 2022 enactment of the Inflation Reduction Act. As a result, the agency has already collected half a billion dollars from individuals in the above brackets with delinquent tax debt.

Preparing for a Potential Business Audit

To avoid being caught off guard by a potential audit, it’s critical to put yourself in the strongest position to defend the items on your tax return before the IRS focuses on your return. This is especially important when dealing with complex business and individual returns, as they rely on supporting documentation.

A mock examination, sometimes referred to as an IRS exam readiness engagement, led by a tax professional can help you do this. These mock examinations typically consist of the following three steps.

Pre-Examination Risk Exposure and Planning

During this first step, the tax professional will help you prepare a pre-IRS examination exposure and planning analysis to help gauge audit readiness in connection with the filed tax returns.

This may include:

• Review of organizational structure and affiliated entities
• Interviews with your personnel to gather pertinent facts
• Discussion of historical tax preparation and accounting systems
• Review of tax returns and identification of potential IRS focus areas based on IRS audit guidelines and techniques
• Discussion of internal resources and the roles and responsibilities of employees, especially in the accounting and tax functions
• Discussion of recent material transactions
• Review of record retention policies and how they are being put into practice
• Review historical and projected tax—including international, federal, state, and local levels—accounting, and financial information to gain an understanding of federal income tax profile

Mock Opening Conference

In this second step, the tax professional will consult with you and hold a mock opening audit conference, which includes:

• Review of the IRS rights and procedures, the exam process, Information Document Request (IDR) process, IRS appeal rights, and mediation strategies
• Preparation and engagement in a mock opening conference and a business interview simulation with subsequent analysis in which the examiner asks questions related to business operations and history as well as tax return preparation

Issuing IDRs

Finally, the tax professional consults with you regarding the IRS’s information gathering process and how to prepare for the types of requests the IRS may issue during a potential audit.

The following activities occur:

• Preparation of general IDRs typically issued in large business and international exams
• Review and analysis of electronic tax records
• Preparation of taxpayer-and Issue-specific IDRs
• Review of hypothetical IRS risk analysis to strategize client responses

After each of the steps and the completed mock examination, the tax professional reviews the findings with you to determine audit readiness and to help address any identified weaknesses.

Although the mock examination process addresses how to prepare a large and complex business for a potential audit, it’s important to note that this process can be tailored to returns of wealthy individuals and the issues specific to them.

We’re Here to Help

To learn more about the IRS’s plans for tax enforcement and how it can impact your business or individual tax filing, please consult your Moss Adams professional.

Additional Resources

• Audits & Assurance Services
• Wealth Management Services