What IRS Audits Will Look Like in 2026: Key Risks for Real Estate Owners and Business Leaders
If you own real estate or run a business, you might be wondering what IRS audits will look like in 2026. The good news is that the IRS is not ramping up random audits as much as some had expected. The bad news is that they are getting better at spotting tax mistakes, and they are focusing more on people with complex filings such as real estate investors and business owners.
So, what does that mean for you? Let’s break it down.
How IRS Audits Are Changing in 2026
Fewer Audits, But Smarter Ones
The IRS was supposed to receive a significant funding boost to increase audits, but in 2026, a portion of that money remains frozen. That means they probably will not be auditing a large number of extra taxpayers. Instead, they are becoming more selective about who they audit and focusing on areas where mistakes or fraud are more likely.
If you have a simple W-2 job and take the standard deduction, you are probably in the clear. But if you own a business, have rental properties, or report large deductions, your tax return could be flagged for a closer look.
More Technology, More Scrutiny
Even with budget adjustments, the IRS continues to invest in artificial intelligence and data analysis tools to catch tax mistakes more efficiently. This means:
- They can spot discrepancies faster, such as when your reported income does not match what a bank or payment processor reports.
- They can compare your deductions to industry standards and flag anything that looks too high.
- They can track cryptocurrency transactions and other digital payments more effectively than before.
So while fewer people may get audited, those who do could face a more thorough review.
What Real Estate Owners Should Watch For in 2026
Rental Income and Deductions
The IRS wants to make sure you are properly reporting rental income, especially if you use platforms like Airbnb or Vrbo. They also check deductions such as repairs, depreciation, and mortgage interest to ensure they are not exaggerated.
What to do: Keep clear records of all rental income and expenses. Separate improvements, which must be depreciated, from repairs, which can be deducted immediately.
Passive vs. Active Income
Real estate investors can qualify for certain tax benefits if they are considered “real estate professionals” by IRS standards. However, this requires proving that you spend most of your working hours on real estate activities.
If you claim real estate professional status but also have a full-time job in another industry, that is a red flag. The IRS has been cracking down on this, so be ready to provide documentation of your hours if you claim this status.
What to do: If you are claiming real estate professional status, keep a log of your time spent managing properties. Be realistic. If you are working 40 or more hours a week at another job, the IRS may not believe your claim.
1031 Exchanges
A 1031 exchange allows you to defer taxes when selling an investment property by reinvesting the proceeds into a similar property. The IRS often scrutinizes these transactions to ensure they meet strict timing and qualification rules.
What to do: Work with a tax professional when doing a 1031 exchange to ensure you follow all IRS guidelines. Even small mistakes can disqualify the tax benefits.
What Business Owners Should Watch For in 2026
Business Deductions
Business expenses are deductible, but the IRS is always watching for deductions that seem excessive or personal in nature. Common areas that raise flags include:
- Large meal and entertainment expenses
- Home office deductions that do not meet IRS guidelines
- Expensive travel that could be considered personal
What to do: Make sure your deductions are reasonable and well-documented. If you claim a home office deduction, it must be used exclusively for business.
Payroll Taxes and Worker Classification
The IRS is still cracking down on businesses that misclassify employees as independent contractors to avoid payroll taxes. If your business relies heavily on contractors, the IRS may check whether they should be classified as employees.
What to do: Ensure your contractors truly qualify as independent under IRS rules. If they work set hours and rely on your company for most of their income, they might need to be classified as employees.
S-Corp and Partnership Income
If you own an S-corporation or partnership, the IRS may review how you are handling distributions versus salary. Taking low or no salary while paying yourself large distributions is a red flag.
What to do: If you are an S-corp owner, pay yourself a reasonable salary based on industry standards before taking large distributions.
What Happens If You Get Audited
An IRS audit does not necessarily mean you did something wrong, but it does mean they want more information. Here is how the process works:
- You will get a letter. The IRS will notify you by mail if you are being audited. They will not call or email.
- They will request specific documents. Depending on the issue, they may ask for receipts, invoices, bank statements, or other records.
- The audit can be done by mail, at an IRS office, or in person. Most audits are done via mail, but more complex cases may require an in-person meeting.
- If they find mistakes, you may owe taxes, penalties, or interest. If the IRS determines you underpaid, they will send a bill. You have the right to appeal if you disagree.
How to Protect Yourself
Even if you are confident in your tax filings, it is always good to be prepared in case the IRS comes knocking. Here is how:
- Keep clear records. Save receipts, invoices, and bank statements for at least three years. For more complex returns, save them longer. Good documentation is your best defense in an audit.
- Report income accurately. The IRS gets income reports from banks, employers, and payment platforms. If your numbers do not match, you are more likely to get audited.
- Avoid rounding numbers. If your tax return is full of round numbers such as $5,000 or $10,000, it looks suspicious. Report actual amounts, even if they are unusual.
- Work with a tax professional. If your taxes are complex, an experienced accountant or tax attorney can help ensure compliance and defend you if an audit happens.
Final Thoughts
While the IRS is not dramatically increasing audits in 2026, they are becoming smarter about how they choose who to audit. If you own real estate or run a business, now is the time to review your tax filings and make sure everything is in order.
At Milikowsky Tax Law, we specialize in IRS audit defense for real estate owners, business investors, and high-net-worth individuals. If you are concerned about increased audit risk in 2026, contact us to discuss how we can help protect your interests.
Contact Milikowsky Tax Law today to discuss your audit risk in 2026.
FAQ
How far back can the IRS audit my business in 2026?
In most cases, the IRS looks back three years. However, if there are substantial errors, fraud, or carried-forward losses, they can examine much older returns.
Is the IRS still focused on cryptocurrency in 2026?
Yes. The IRS is expanding its ability to track and analyze cryptocurrency and digital asset transactions. These are a growing focus area for audits.
Why should I work with a tax attorney instead of only a CPA?
Your CPA prepares and files your return, but only a tax attorney is equipped to defend you in legal proceedings with the IRS. If you receive an audit notice, legal representation can protect your rights and reduce your liability.
Are business owners more likely to be audited than individuals?
Yes. Business owners, real estate investors, and high-net-worth individuals face greater scrutiny because their tax filings are more complex and involve higher-dollar amounts.
