UPDATED: January 2023:
The combination of the Budget Reconciliation Act, the retiring of many seasoned IRS agents, and the re-funding of the IRS to hire 87,000 new audit agents in the next 5 years is the perfect storm for business owners facing IRS Audits.
Facing an IRS audit without a qualified Tax Attorney is unadvisable with an experienced revenue agent. With a new agent, it is unpredictable and dangerous to the health of your business.
Contact the team of highly experienced San Diego Tax Attorneys at Milikwosky Tax Law today.
As a result of the COVID-19 pandemic, many IRS revenue agents are retiring. This, coupled with the influx of newly hired revenue agents (coming with the expansion of the IRS budget from the Inflation Reduction Act), leads to one significant result for business owners:
If you are audited by IRS, you are likely to be audited by a new revenue agent instead of by a senior.
The founder of Milikowsky Tax Law, John Milikowsky, explains the importance of this for business owners as well as how to prepare for an audit with a newly hired revenue agent in the video below:
Why is IRS Hiring New Revenue Agents?
IRS is hiring new revenue agents because of:
- The effects of the COVID-19 pandemic, and
- The Inflation Reduction Act
The COVID-19 Pandemic
Pre-COVID, there were many IRS agents with upwards of 30 years of experience under their belts. During the shutdown, many of those agents chose to retire—leaving a younger, less experienced auditing population at the Internal Revenue Service.
The Inflation Reduction Act
The Inflation Reduction Act allocates $79.6 billion to the International Revenue Service over the next decade. With the increased budget resulting from the Inflation Reduction Act, IRS will be expanding its staff.
IRS will be hiring additional:
- Revenue agents (to conduct audits)
- Criminal Investigators (to carry out criminal investigations)
- Revenue officers (to collect taxes)
How Will These New Revenue Agents Change the IRS Audit Process?
Experienced agents understood how companies work and had a wide framework of business structure with which they could assess business operations. After 30+ years of experience, you might say they’d seen it all!
What that meant for companies being audited is that oddities in billing or accounting structures looked like the quirks they are, not deliberate obfuscation of the financial reality of a company’s books.
A younger agent, on the other hand, will need your business processes and procedures laid out clearly, simply, and concisely.
If you have deposits that don’t equal your income declaration, there are myriad reasons why that might be true, legal, and totally legitimate. Chargebacks are one that comes swiftly to mind.
How Can Business Owners Navigate Changes in IRS Audits?
Let’s go over a few simple steps that business owners can take to navigate these changes in the event of an IRS audit.
#1: Prepare Paperwork
IRS should list the information it requires in your audit letter. Once you know what information IRS needs, you can collect all of the records and supporting documentation requested (but nothing additional).
For example, you may need to submit records such as:
- Bank statements
- Receipts (from vendors, and businesses you have worked with)
- Pay stubs
- Payroll records
- And other information
You can view a list of records IRS may request. It’s a good idea to organize and prepare the paperwork IRS requests from you so you can walk the revenue agent through your business.
If you notice oddities in your books—for example, why you took certain deductions—craft and present your narrative. You should be prepared to answer questions about why you made these choices.
#2: Clearly Explain Your Business
Be sure to clearly explain how you run your business:
- Offer examples
- Only provide information that is asked for (to prevent the audit from spreading to additional areas of your business), and
- Respond in a timely fashion
IRS audits are intimidating, take time, and can result in fees and penalties that can cripple a business. This considered, take every step of the audit process seriously.
#3: Consider Hiring an Experienced Tax Attorney
In the event of an IRS audit, business owners should consider enlisting the help of an experienced tax attorney.
A tax attorney can help to guide you through the process of an IRS audit as well as navigate any issues brought on by a less experienced revenue agent.
At Milikowsky Tax Law, we are your relentless advocate in the face of IRS, EDD, CFTB, CSLB, and government agency audits.
Still Have Questions?
Business owners should contact Milikowsky Tax Law if they have any additional questions about how to navigate these changes.
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 in 2022.