As we near the end of 2023, business owners are eager to know what to expect for IRS tax audits for 2024 with questions such as: What areas will the IRS focus on in the coming year? How can we steer clear of potential audit triggers? What proactive steps can we take to ensure compliance and financial well-being?
In this blog, we will answer all these questions and more.
IRS’s Pursuit of Wealthy Taxpayers: What to Expect
The IRS’s primary mission in 2024 is to ensure that taxpayers meet their obligations. One significant development is the IRS’s commitment to cracking down on wealthy taxpayers who owe back taxes. The agency has set its sights on around 1,600 millionaires who each owe at least $250,000 in overdue taxes. This heightened focus on high-end collections cases is part of the IRS’s strategy for fiscal-year 2024, which commences in October and concludes in September 2024.
This initiative is backed by the 2022 Inflation Reduction Act, which allocated $80 billion to the IRS. More than half of this substantial funding is earmarked for additional enforcement agents. The primary goal is to uncover concealed income and underreported earnings among the wealthy. Unlike lower-income individuals whose earnings are typically reported through W2s and other tax forms, affluent taxpayers often have more complex financial structures, making it essential for the IRS to employ specialized tactics.
Enhanced Scrutiny of Large Business Partnerships
In addition to pursuing wealthy individuals, the IRS is increasing its scrutiny of large business partnerships with average assets exceeding $10 billion. This category of businesses will be a major focus of tax compliance in 2024. Further, the IRS plans to employ artificial intelligence (AI) to track tax cheats more effectively.
No Increase in Audit Rates for Lower-Income Earners
Despite these targeted efforts, the IRS is assuring that it doesn’t intend to raise audit rates for individuals earning less than $400,000 annually. This assurance comes as some Republican lawmakers and policy experts raised concerns about the new IRS funding being used to target middle-income workers.
Audit rates have been decreasing over the years due to the IRS’s shrinking workforce. The agency had 82,000 employees in fiscal-year 2021, down from 94,000 in 2010, even as the U.S. population and the number of taxpayers have increased.
The significant surge in individuals with incomes over $1 million in the last decade hasn’t been met with a proportional increase in audits on million-dollar tax returns. In fact, the number of audits on such returns has fallen by two-thirds.
Priority Areas for Compliance Work in 2024
In its effort to restore fairness to the tax system and generate more revenue, the IRS has identified several priority areas for compliance work in 2024:
1. Digital Assets: The IRS continues to expand its efforts concerning digital assets, employing tools like the John Doe summons and releasing proposed regulations for broker reporting. The IRS Virtual Currency Compliance Campaign is set to continue, addressing potential non-compliance cases identified through digital currency exchanges.
2. FBAR Violations: High-income taxpayers are often found using foreign bank accounts to evade disclosure and related taxes. The IRS plans to audit the most severe cases of potential non-filer FBAR violations in Fiscal Year 2024.
3. Labor Brokers: Instances have been observed where construction contractors make payments to apparent subcontractors that are, in reality, “shell” companies with no legitimate business relationship. The IRS will increase attention in this area through civil audits and criminal investigations to enhance compliance and ensure proper employment tax withholding.
IRS announces sweeping effort to restore fairness to tax system with Inflation Reduction Act funding; new compliance efforts focused on increasing scrutiny on high-income, partnerships, corporations and promoters abusing tax rules on the books
How Business Owners and High-Earners Can Prepare
The IRS’s renewed focus on tax compliance for high-earners and businesses means that proactive measures are key to avoiding potential audits and maintaining financial well-being. Here are some steps business owners and high-earners can take to prepare for the upcoming year:
1. Maintain Impeccable Records
Accurate and well-organized financial records are your first line of defense in the event of an audit. Ensure that you keep comprehensive records of your income, expenses, and deductions. Digital record-keeping systems can be particularly helpful in this regard.
2. Seek Professional Guidance
Given the complexity of tax regulations, it’s advisable to consult with a tax professional. They can help you navigate the tax landscape, maximize deductions, and ensure compliance with changing tax laws.
3. Embrace Digital Tools
With the IRS’s increased focus on digital assets and transactions, consider using digital tools to manage your financial affairs. This not only makes record-keeping more efficient but also reduces the risk of errors and omissions.
4. Regularly Review Your Tax Strategy
Tax laws and regulations change over time. It’s important to periodically review your tax strategy to ensure it aligns with the current laws and provides opportunities for tax savings.
5. Understand Reporting Requirements
If you have foreign assets or accounts, make sure you understand the reporting requirements, especially in light of the IRS’s enhanced scrutiny of FBAR violations.
6. Stay Informed
Keeping yourself informed about tax changes and audit triggers is essential. Subscribe to IRS updates, consult tax publications, and stay engaged with tax professionals for the latest insights.
7. Consider Tax Planning
Effective tax planning is a proactive way to manage your tax liability. By strategically structuring your income and deductions, you can potentially reduce your tax burden.
8. Maintain Transparency
Honesty and transparency are key. Accurately report your income and assets to the IRS. Attempting to hide or underreport can lead to more severe consequences if discovered.
9. Protect Against Identity Theft
With the IRS focusing on identity theft protection, ensure that you safeguard your personal and financial information to prevent fraudulent activities.
10. Be Prepared for Audits
While you strive to minimize the risk of audits, it’s wise to be prepared just in case. Familiarize yourself with the audit process, gather necessary documents, and consider seeking professional representation if audited.
As you move into 2024, it’s essential to approach your tax responsibilities with a proactive mindset. By staying ahead of the game, you can not only reduce the likelihood of audits but also ensure that your financial affairs are in order, allowing you to focus on the growth and success of your business.
The IRS’s intensified efforts to restore fairness to the tax system and increase compliance mean that business owners and high-earners should be prepared for a more stringent regulatory environment. By staying informed, seeking professional advice, and maintaining rigorous financial records, you can navigate these challenges effectively, ensuring that your financial well-being remains intact.
As 2024 approaches, keep these tips in mind to stay on the right side of the IRS and continue to thrive in your financial endeavors. The road to compliance and financial success begins with preparation and knowledge.
Stay tuned for more updates and insights as we delve deeper into the evolving tax landscape in the coming year. Your financial success is our priority.
At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.
Interested in learning more? Read on to learn how to respond to an IRS audit.