IRS Audits in 2026: New Rules, New Technology, and New Triggers Every Business Should Prepare For
IRS audits are changing in 2026. New reporting rules, expanded enforcement funding, and AI-driven audit selection are reshaping how taxpayers are identified, contacted, and reviewed. If you are a business owner or financial professional, staying ahead of these shifts can help you avoid penalties, prepare documentation that aligns with IRS expectations, and respond quickly if your return is flagged.
Below is a clear breakdown of what is changing and how to prepare for the 2026 audit landscape.
The IRS Is Increasing Focus on High Income and Complex Returns
How IRS Priorities Are Shifting
With continued funding from the Inflation Reduction Act, the IRS is dedicating more resources to high income individuals, partnerships, S corporations, and businesses with complex financial activity. This includes taxpayers earning more than $400,000 and entities with layered ownership structures or multiple deductions and credits.
Why This Change Matters
Complex returns have more opportunities for reporting errors. Even small inconsistencies can trigger additional review, automated notices, or a formal audit.
How to Prepare
- Verify all income sources before filing
- Maintain clear documentation for business expenses, deductions, and partnerships
- Have a qualified tax professional review your return before submission
The IRS Is Now Using AI to Identify Audit Targets
The Rise of Data Analytics in Audits
The IRS announced that it is expanding its use of artificial intelligence and machine learning to detect patterns, uncover inconsistencies, and match data across millions of records. These tools help the IRS flag discrepancies more quickly than traditional manual audits.
What This Means for You
Automated systems can match your return with third-party data, including W-2s, 1099s, payroll records, bank information, and new digital asset reporting forms. If the system detects a mismatch, you may receive a notice before a formal audit begins.
How to Prepare
- Keep digital records organized and accessible
- Reconcile all income sources before filing
- Review prior year returns to ensure consistent reporting
New Digital Asset Rules Begin in 2026
Form 1099 DA Will Create More IRS Matching Notices
Beginning with the 2026 tax year, brokers must issue Form 1099 DA to report digital asset activity. The definition of broker is broader than many taxpayers expect and includes cryptocurrency exchanges, payment processors, and some wallet providers.
Why This Increases Audit Risk
More third-party reporting means more data for the IRS to match against your return. Any missing transactions or incorrect cost basis reporting can automatically trigger a notice.
How to Prepare
- Track each digital asset transaction, including dates, amounts, and fair market values
- Confirm whether your platform will be issuing a 1099 DA
- Work with a tax professional familiar with digital asset reporting rules
The IRS Is Intensifying ERC and Payroll-Related Audits
ERC Claims Are a Major 2026 Enforcement Priority
The IRS continues to investigate Employee Retention Credit claims and has publicly committed to identifying improper filings. Many small businesses are receiving audit letters, repayment demands, or requests for substantiation.
Why Payroll Issues Trigger Audits
Payroll tax discrepancies, missed filings, and worker classification issues often overlap with ERC reviews. These areas are now audited together more frequently.
How to Prepare
- Keep all ERC documentation organized, including worksheets and calculations
- Review your payroll filings for the past three years
- Confirm that worker classification policies match your filings
Increased Scrutiny of Partnerships and Pass-Through Entities
Why Partnerships Are a Target in 2026
The IRS is expanding its partnership audit selection using new AI tools. Returns with large losses, complex allocations, or multiple related entities are being reviewed more often.
What the IRS Is Looking For
- Accuracy of partner allocations
- Validity of basis calculations
- Proper reporting of flow through income and losses
How to Prepare
- Maintain detailed basis worksheets
- Reconcile all K-1 information before filing
- Review partnership agreements for compliance issues
New Audit Triggers Businesses Should Expect in 2026
Common Red Flags This Year
In 2026, the IRS is focusing on several categories that present higher audit risk:
- Large charitable deductions
- Significant Schedule C income
- Repeated business losses
- Real estate professional status claims
- Digital asset transactions
- ERC claims
- High value business deductions
- Unreported foreign assets or accounts
Why These Areas Stand Out
These categories often include complex tax positions or incomplete documentation. The IRS is using automated reviews to flag inconsistencies much earlier in the process.
How to Prepare for an IRS Audit in 2026
Organize Documentation Digitally
The IRS is digitizing more of the audit process, which means electronic records are easier to review and request.
Review Returns Before Filing
Look for omissions, inconsistencies, or mismatched income sources that could prompt a notice or audit.
Respond Quickly to IRS Letters
Many audits begin as automated notices. Timely and accurate responses can prevent the issue from escalating.
Work with an Experienced Tax Team
A qualified advisor can help verify your return, prepare documentation, and represent you in communications with the IRS.
Final Thoughts
The 2026 audit environment is more technology-driven, more data-heavy, and more focused on high-risk areas than previous years. Businesses and individuals who stay organized, understand the new rules, and prepare documentation early will be in the best position to navigate an audit with minimal disruption.
Need Help Navigating an IRS Audit?
At Milikowsky Tax Law, our team has more than a decade of experience working directly with the IRS, EDD, and other government agencies. We help business owners respond to audit notices, prepare records, and defend their filings with confidence.
If you have received a notice or want to prepare proactively, contact us to schedule a consultation.
