An audit can be a time-consuming process. While you cannot avoid a tax audit, you can minimize your risk of an audit by avoiding potential flags on their tax return. The most frequent IRS audits are caused by inconsistencies or errors in your tax return that raise red flags in the eyes of the IRS.
When you work with Milikowsky Tax Law, you get more than an experienced tax litigation attorney. You get an experienced business and tax advisor who can work with you to reduce your chances of being audited, with our comprehensive tax return assessment system and years of business experience.
California’s Top IRS Audit Attorney
Our leading tax litigation attorney, John Milikowsky, has decades of experience representing countless businesses in legal tax matters. Mr. Milikowsky is dedicated to relentlessly defending his clients in everything from state and federal tax audits to criminal tax investigations. As a full-service tax law firm, we frequently work with business owners to empower owners to identify issues on their own tax returns. While there is no way to guarantee you will avoid a tax audit, we can teach you to significantly minimize your risk of an audit.
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Milikowsky Tax Law Defends Businesses in IRS Audits
When you’re faced with the formidable presence of a tax audit, don’t panic. Reach out to Milikowsky Tax Law, and we will protect your company to keep your business in business. Our skilled tax litigation attorneys will protect your rights every step of the way.
Whether you’ve just received a letter from the IRS, or you need help analyzing your legal rights and financial data reported on your tax returns, contact us today. The team at Milikowsky Tax Law is here to help.
San Diego Tax Attorney – Your Relentless Advocate in IRS Audits
Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to overwhelm your life or impede your ability to conduct business. With the experienced team at Milikwosky Tax Law, you can navigate the process of an IRS audit secure in the knowledge that your tax attorneys are advocating for you every day.
There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences for a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
If you receive a letter from IRS confirming your business tax return has been selected for examination, review your return and identify the items that will likely be investigated so you can be prepared. Then, before communicating with IRS, reach out to an experienced IRS audit attorney. Having a game plan is critical. You want to be honest and prepared when speaking with your IRS revenue agent.
Anytime you file taxes, there is a chance that your tax return might be audited by the Internal Revenue Service (IRS). The agency conducts standard procedures to find any errors or discrepancies among taxpayers. The audit process is meticulous and, should you find yourself under the scrutiny of IRS, will require detailed information from you.
In the article below, you’ll learn about the audit process and frequently asked questions surrounding IRS audits.
Why was I selected for an IRS Audit?
There are different reasons you may be flagged for IRS audits. Some are due to random checks; however, you have a low chance of being audited this way. Most taxpayers have less than a 0.6% chance of receiving a random audit check.
IRS runs tax returns through its Discriminant Information Function (DIF) system to continually update their database and make sure they are tracking industry benchmarks for each industry and tax bracket.
The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, such as an imbalance of tax returns, a discrepancy between reported earnings and employer filings, or unreported cash transactions by one member of a transactional party, will trigger DIF to send your return to an IRS audit officer.
People are more susceptible to an audit if they:
- Earn less than $25,000 or more than $500,000
- File incorrect or incomplete returns
- Have large numbers of cash transactions
- Claim a disproportionate number of deductions
- Are self-employed
- Have a home-based business
- Have a cash business
- Have foreign assets
Sometimes you can be audited as a result of your business partners or investors going through an audit.
How Will I Know If I am Selected for an Audit?
You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit.
What Do I Do If I’m selected for an Audit?
If you or your business are selected for an audit, make sure you read all of the information sent to you in your audit notification letter. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. Once you know what IRS needs, make sure you collect all of the records and supporting documentation requested (but nothing additional). You will need to submit records from banks, vendors, and businesses you have worked with, invoices and pay stubs, payroll records, and medical expenses among other information.
Should I Hire an IRS Tax Attorney to Help Me?
We suggest contacting a qualified tax attorney to help guide you through your audit, to ensure you are timely, responsive, compliant, and do not unintentionally increase the scope of your audit to other areas of your business or personal finances that would otherwise remain unscrutinized.. There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences to a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
How long do I have to reply to an IRS audit?
You have 30 days to reply to the initial audit letter. Do not hesitate, and make sure you take the appropriate steps early on. IRS is not likely to provide extensions unless you have a good reason. Your attorney can help by advocating for more time with the IRS agent. A good attorney will know many of your local IRS auditors and have strong relationships built on well-structured prior cases and mutual respect.
How Long Do Audits Take?
The time it takes to conduct an audit depends on the case. It fluctuates depending on:
- The seriousness of the tax reporting error
- When and whether the right information is provided to IRS
- Communication between the person being audited and IRS officer
How Many Years of Tax Returns Can IRS audit?
IRS audits tax returns from the past three years; however, most are from the past two years. Only when IRS agents find discrepancies within the audit they are conducting do they dig for information older than three years. Most audits do not look for information past six years. Though in cases of criminal audits IRS can look back 9 years and longer.
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.
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 may be wondering what IRS audits will look like in 2026. The good news is that the IRS is not dramatically expanding random audits. The less reassuring reality is that enforcement is becoming more targeted, data-driven, and focused on taxpayers with complex filings, including 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 received additional enforcement funding in recent years, but portions of that funding have been delayed, reallocated, or rolled out gradually. As a result, the IRS is not auditing a significantly larger number of taxpayers overall. Instead, it is becoming more selective and concentrating resources where errors, omissions, or abuse are statistically more likely.
If you earn W-2 income and take the standard deduction, your audit risk remains relatively low. However, if you own a business, hold rental properties, or report large or complex deductions, your return is more likely to receive closer scrutiny.
More Technology, More Scrutiny
Even with shifting budgets, the IRS continues to invest heavily in data analysis and automation tools to identify inconsistencies and risk patterns. These tools allow the IRS to detect income mismatches between tax returns and third-party reports from banks, employers, and payment processors, compare deductions against historical patterns and industry benchmarks, and more effectively track cryptocurrency and digital asset transactions.
While fewer taxpayers may be audited overall, those selected for audit may face more detailed and document-intensive reviews.
What Real Estate Owners Should Watch for in 2026
Rental Income and Deductions
Rental income remains a major focus area, particularly as short-term rental platforms continue expanding information reporting to the IRS. Deductions such as repairs, depreciation, and mortgage interest are also reviewed closely to ensure they are properly classified and supported.
What to do: Maintain clear, organized records of rental income and expenses. Distinguish between repairs, which are generally deductible in the year incurred, and improvements, which must be capitalized and depreciated over time.
Passive vs. Active Income
Real estate investors who qualify as real estate professionals can unlock significant tax benefits, but the requirements are strict. You must demonstrate that more than half of your working time and at least 750 hours per year are spent on qualifying real estate activities.
Claiming real estate professional status while maintaining a full-time job in another industry remains a common audit trigger. The IRS continues to challenge unsupported claims aggressively.
What to do: If you claim real estate professional status, maintain contemporaneous time logs and supporting documentation. Be realistic. If most of your working hours are spent elsewhere, the IRS is unlikely to accept the designation.
1031 Exchanges
1031 exchanges allow investors to defer capital gains taxes by reinvesting sale proceeds into qualifying replacement properties. These transactions are frequently audited due to their strict timing, identification, and reinvestment requirements.
What to do: Work closely with a qualified tax professional when structuring a 1031 exchange. Minor procedural errors can disqualify the transaction and trigger immediate tax liability.
What Business Owners Should Watch for in 2026
Business Deductions
The IRS continues to scrutinize deductions that appear excessive or personal in nature. Common audit triggers include large meal expenses, nondeductible entertainment expenses, home office deductions that do not meet exclusivity requirements, and travel expenses that blur the line between business and personal use.
What to do: Ensure deductions are reasonable, well-documented, and clearly tied to business activity. Home office deductions must be used exclusively and regularly for business purposes.
Payroll Taxes and Worker Classification
Worker misclassification remains a priority enforcement area. Businesses that rely heavily on independent contractors may be reviewed to determine whether those workers should legally be treated as employees.
What to do: Confirm that contractors meet IRS classification standards. Workers who follow set schedules, use company equipment, or depend primarily on your business for income may require employee classification.
S-Corporation and Partnership Income
For S-corporation owners, paying little or no salary while taking large distributions continues to raise red flags. The IRS expects owner-employees to receive reasonable compensation before distributions.
What to do: Pay a salary that aligns with industry norms and the services you provide before taking distributions.
What Happens If You Get Audited
An audit does not automatically mean wrongdoing, but it does mean the IRS wants clarification. The process typically follows this sequence.
How to Protect Yourself
Preparation is the most effective audit defense.
Keep clear records. Retain receipts, invoices, and bank statements for at least three years. For real estate, partnerships, or returns involving significant losses, the IRS may look back six years or more in certain circumstances.
Report income accurately. The IRS receives third-party income reports. Discrepancies increase audit risk.
Avoid rounded numbers. Returns filled with round figures such as $5,000 or $10,000 appear suspicious. Report exact amounts whenever possible.
Work with a tax professional. Complex filings benefit from experienced guidance and representation if an audit arises.
Final Thoughts
The IRS is not dramatically increasing audit volume in 2026, but it is becoming more precise in how it selects returns for review. Real estate owners and business leaders with complex tax profiles should take this opportunity to review filings, documentation, and risk exposure before an audit notice arrives.
At Milikowsky Tax Law, we focus on IRS audit defense for real estate owners, business investors, and high-net-worth individuals. If you want a second set of eyes on your audit exposure in 2026, our team 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. If there are substantial errors, omitted income, fraud, or carried-forward losses, they can examine older returns.
Is the IRS still focused on cryptocurrency in 2026?
Yes. Cryptocurrency and digital asset transactions remain a growing audit focus as reporting and tracking capabilities expand.
Why work with a tax attorney instead of only a CPA?
A CPA prepares and files tax returns. A tax attorney can provide legal representation, protect attorney-client privilege, and defend you in disputes or litigation with the IRS.
Are business owners more likely to be audited than individuals?
Yes. Business owners, real estate investors, and high-net-worth individuals face greater scrutiny due to complexity and higher dollar amounts involved.