The IRS has shifted its audit focus away from low- and middle-income taxpayers and onto the wealthy. It recently launched a new audit campaign targeting high earners and partnerships, using funds from the Inflation Reduction Act.
The IRS has already begun sending notices to 1,600 millionaires with high tax debt and 500 partnerships with income of at least $10 million.
If you’re a high earner who’s scared of ending up in the IRS’s crosshairs, don’t panic—but do be prepared. Here’s what you need to know to avoid extra tax liability, penalties, and even criminal investigations.
Who Is Being Targeted in the New IRS Audit Campaign?
The IRS is focusing on individuals and certain businesses with high levels of income. Specifically, the IRS is looking closely at 1,600 millionaires with known tax debt of $250,000 or more. They are also checking on more than 500 partnerships that make over $10 million. These taxpayers are at high risk of being selected for an IRS audit.
Why Is the IRS Auditing Wealthy Taxpayers and Partnerships?
For many years, the IRS has focused tax audits on low- and middle-income taxpayers. By shifting focus to the wealthy, the IRS is expected to get much more bang for its buck.
In the past, the cash-strapped IRS audited more low-income taxpayers because those tax audits were relatively simple. “These [low-income] taxpayers wouldn’t have the means to hire representation, so the IRS could close the audits quicker and on a much smaller budget,” says attorney John Nagle, Manager of Tax Controversy. “But the amount they’re collecting with these audits is miniscule compared to the top 5% of earners.”
The new wave of audits will require more time and resources from the IRS—such as more experienced, specialized examiners—but these audits are expected to generate significantly more tax revenue.
According to a working paper published by the National Bureau of Economic Research, the IRS can more than double its return on investment by auditing taxpayers with income above the national median.
How to Prepare: 5 Essential Tips for High Earners
If you’re a high net worth individual (HNWI) or the owner of a high-income partnership, it’s important to be ready for the IRS’s new focus on auditing high earners. But don’t worry, there are steps you can take to prepare and protect yourself.
Here are 5 key tips from our IRS audit lawyers to help you avoid extra taxes and penalties:
1. If You Receive an IRS Notice, Act Quickly
Targets of the new IRS campaign won’t be audited right away. First, the IRS will send a notice asking for clarification of a specific issue—for example, why certain income wasn’t reported on your 2020 tax return.
“The letters will likely focus on a specific item in a specific year,” says Nagle, “but once an audit is opened, they can look at everything.” This increases the risk of high tax liability and additional penalties.
Your tax preparer or an experienced tax attorney can help you respond to the notice and, hopefully, prevent an IRS audit.
2. One IRS Audit Could Lead to Several
Imagine you’ve just gotten through a stressful tax audit, and you think it’s all over. You’re not happy with the high tax bill you have to pay, but at least you don’t have to worry about the IRS again.
But then, 6 months later, another notice arrives—you’re facing another audit! This situation is surprisingly common, especially for business owners.
For example, one owner of a partnership could have their individual tax return audited. Then, the IRS could audit the partnership itself (even an entity that doesn’t have its own tax liability, like an S-corp). The other partners could then have their individual tax returns audited, as well.
It’s like a chain reaction of tax audits, and it all depends on what’s revealed during each audit process.
Each separate audit can lead to tax debt, penalties, or (in the worst-case scenario) a criminal investigation.
3. You Can Hire Representation—The Earlier, the Better
Many people don’t realize that they can hire a professional to defend them during an audit. Others are afraid that hiring an attorney will make them look guilty. In fact, it’s both commonplace and recommended to hire a tax attorney—especially for those with complex tax returns.
There are several benefits to seeking professional audit representation:
- Make the Audit Less Stressful: Hiring a pro minimizes disruption to your daily life or business operations. In most cases, our clients never have to speak to the IRS directly.
- Reduce Your Tax Bill: A tax attorney can reduce your tax bill by defending specific items on your tax return and negotiating reduced penalties before the audit is even closed.
- Prevent the Audit from Escalating: A simple, offhand remark from an unwary taxpayer can increase the scope of an audit, resulting in more tax owed. “Don’t back yourself in a corner by revealing something that could indicate there are inaccuracies,” says Nagle. “Answer as directly as possible without providing additional information.”
- Defend Your Rights: When it comes to tax audits, the IRS is not on your side. The examiner’s goal is to assess as much tax due as possible. A tax attorney understands all the tricks used during an IRS audit and can help you fight back.
- Reduce the Risk of Criminal Investigation: If you have the slightest concern about a criminal tax investigation, consult an experienced tax attorney as soon as possible—ideally before the IRS contacts you. In these cases, it’s extremely risky to speak to the IRS yourself.
4. Record-Keeping Is Key
“Wealthy taxpayers should be more diligent in their tax preparation and how their records are maintained now that they’re under extra scrutiny,” says Nagle.
The typical IRS look-back period is 3 years, so both taxpayers and their accountants should maintain records for at least that long. Failing to do so will make it difficult to defend your tax return in an audit. Plus, it can result in additional negligence or accuracy-related penalties.
5. Make Sure Your Tax Professional Can Handle Complex Returns
The more sources of income you have, the more complicated your tax return becomes. With each layer of complexity comes additional risk of making a mistake, and that could cost you during an audit.
Here are just a few things that can make your tax return complex:
- Business ownership, especially if you own multiple businesses
- Offshore bank accounts
- Full or partial ownership of a foreign company
- Receiving gifts from a trust
- Investing in cryptocurrency
All professional tax preparers can handle a simple tax return, but the items above require focused knowledge and experience.
To reduce the risk of mistakes and penalties, make sure you hire a professional who’s experienced in complex tax returns—whether you’re seeking audit representation or simply filing your annual return.
Scared of an Audit? Gordon Law Group Can Help!
Facing an IRS audit can be daunting, especially with the increased scrutiny on high earners, but you don’t have to face it alone. Gordon Law Group is here to help.
Our team of tax attorneys has years of experience defending complex IRS audits, helping our clients save millions on taxes and penalties. Our attorney-client privilege and clear, honest guidance give you the ultimate peace of mind.
Don’t wait until it’s too late. If you have any questions about an IRS audit, reach out for a free and confidential consultation today.