IRS Audits – What Business Owners and High-Income Earners Need to Know
IRS audits are rare, but they can be complex and costly when they occur. While the overall audit rate remains low, high-income earners and taxpayers reporting significant deductions or losses face an elevated risk. Lawmakers continue to push for increased IRS funding, which could lead to more enforcement activity in the future.
Current IRS Audit Trends
- Overall audit risk is low – In 2020, only about 0.25% of individual tax returns were audited.
- High-income earners face greater scrutiny – Taxpayers reporting more than $10 million in income had a 5.3% audit rate, while those with losses faced a 2% audit rate.
- Most audits are correspondence-based – The IRS conducts 3.2 million letter audits annually, mainly for math errors and unreported 1099/W-2 income.
- Field audits generate significant revenue – Despite making up a small portion of audits, in-depth IRS examinations collected over $10 billion in adjustments.
What Increases the Risk of an Audit?
- Using round numbers instead of actual figures.
- Excessive deductions relative to reported income.
- Repeated business losses on Schedule C.
- Unreported income that the IRS already knows about from 1099s or W-2s.
- Large charitable contributions relative to income.
- Claiming certain tax credits that are frequently audited.
How to Stay Prepared
- Maintain detailed records – Proper documentation is your best defense in an audit.
- Stay compliant with IRS reporting – Ensure income reported matches what the IRS receives.
- Sign IRS Powers of Attorney – This allows Linked Accounting to receive IRS correspondence on your behalf, helping address issues proactively.
While the odds of an audit remain low, IRS enforcement efforts are increasing. If you receive an IRS notice or have concerns about audit risk, reach out for professional guidance.
