Are IRS Audits on Small Businesses Increasing?

Many people have started to wonder: “Are IRS audits on small businesses increasing?” 

The recent Inflation Reduction Act of 2022 included provisions for increased tax enforcement and other changes over the next decade, raising concerns about a rise in audit risk for small businesses. To understand how the IRS small business audit trends will affect your business, working with a tax attorney who has a rigorous understanding of the latest regulations is helpful.  

Are IRS Audits on Small Businesses Increasing? 

Those concerned about increased IRS enforcement should understand the trends within the department over the last few years and how they impact audit rates. From 2012-2019, the IRS’s budget decreased by 14%, leading to a major slowdown. The service faced reduced technology and a lower headcount.  

The result of this understaffing was worse customer service and slower processing of returns. Audits also focused mainly on high-income individuals rather than small businesses. With the increase in funding, this approach may change as the IRS hires more auditors to focus on small business tax compliance.  

In the initial act, the IRS claimed that their enforcement would focus on those earning more than $400,000 per year, but this is subject to change as the funding allows for technology and staffing increases. IRS audit rates in 2025 are likely to be similar to the rates for last year for small businesses.  

What Are IRS Audit Red Flags Small Businesses Should Know? 

Small businesses should be aware of the primary issues that may draw the IRS’s attention beyond random audits. Working with a tax attorney can help you stay compliant and avoid these red flags. The basic steps to follow include: 

• Prompt tax filing: Small businesses should stay on top of tax deadlines and avoid late returns, which tend to receive additional scrutiny. It is also important to know that the statute of limitations for tax penalties begins on the date of filing rather than the date the return was originally due.  
• Honesty in returns: When filing a tax return, be honest about income and expenses. The IRS can access electronic payment processing, and trying to hide cash flow can result in major penalties. Maintaining accurate records of income and expenses is also a crucial aspect of effective business management. 
• Avoid gimmicks: While it can sometimes be tempting to try and reduce your business’s tax burden through “loopholes,” such as creating an overseas company or a trust, these measures tend to increase IRS attention on your business. These measures may also be more expensive to set up and maintain than the tax savings are worth, depending on the size of your business and your annual revenue. 

How a Tax Attorney Can Help With Small Business Tax Compliance

When in doubt, small businesses should consult a tax professional such as an accountant or attorney. A tax attorney can help ensure your small business taxes are compliant with state and federal laws and help you feel supported through the filing process. A tax attorney will also be knowledgeable about current trends within the IRS and be able to provide you with more information about how changes might affect your return. 

Protect Your Small Business With Levy & Associates

Levy & Associates offers tax consultancy to small businesses in Florida. Working with a knowledgeable tax attorney can make the filing process easier and ensure that your returns are timely and comprehensive, helping you avoid IRS audit red flags.  

Now you understand the answer to “Are IRS audits on small businesses increasing?” To learn more, call 877-620-6490 or contact Levy & Associates online.