IRS Audits on Small Businesses in 2025: Separating Fact from Fiction

Analyzing the veracity of claims that the IRS is auditing 50% more small businesses in 2025 requires a deep dive into the agency’s funding, strategic priorities, and historical audit trends to determine if such an increase is plausible and supported by evidence.

The claim that the IRS will significantly increase audits on small businesses by 50% in 2025 has sparked considerable concern among entrepreneurs and business owners. Is this projection based on solid data, or is it simply a reflection of anxieties about increased IRS funding and activity?

Understanding the Context of IRS Funding and Oversight

To accurately assess the claim regarding increased IRS audits on small businesses, it’s important to fully understand the funding that the IRS has received over the past few years. How does this funding relate to what the future might bring?

It is also very important to examine the oversight mechanisms in place to avoid potential abuses from the IRS and how they are working.

Inflation Reduction Act and IRS Funding

The Inflation Reduction Act (IRA), enacted in August 2022, provided the IRS with approximately $80 billion in increased funding over the next decade. This substantial investment is earmarked for various improvements, including upgrading outdated technology, enhancing customer service, and increasing tax enforcement. From the beginning, much of the funding was mischaracterized on social media as being for hiring 87,000 armed IRS agents. Understanding the intent behind each of the investment areas will help one see the truth in the claims regarding more audits of small businesses in 2025.

• Technology Upgrades: A significant portion of the funds is allocated to modernizing the IRS’s aging IT systems. This upgrade aims to streamline operations, enhance cybersecurity, and improve the overall efficiency of the agency.
• Enhanced Customer Service: The IRS plans to use some of the funding to improve taxpayer assistance. This includes expanding call center support, providing more accessible online resources, and offering personalized guidance to taxpayers.
• Tax Enforcement: A portion of the IRA funding is dedicated to increasing tax enforcement activities. This includes hiring more auditors, enhancing data analytics capabilities, and pursuing complex tax evasion cases.

The IRS is planning to invest in resources that will help them audit high income individuals and large corporations with more complex tax situations. Only a very small portion of the funding is intended for small businesses.

Oversight Mechanisms and Taxpayer Protections

To prevent potential abuses of power and protect taxpayer rights, there are several oversight mechanisms in place to monitor the IRS activities. To begin, Congress has direct oversight of the budget so if IRS activities go too far, they can reduce funding. Additionally, there are internal quality control processes to ensure they are being properly applied.

• Taxpayer Advocate Service (TAS): The TAS is an independent organization within the IRS that helps taxpayers resolve issues they are unable to resolve on their own. The TAS advocates for taxpayer rights and works to ensure fair and equitable treatment.
• Treasury Inspector General for Tax Administration (TIGTA): TIGTA is an independent watchdog that audits and investigates the IRS to ensure compliance with laws and regulations. TIGTA also investigates allegations of misconduct and abuse within the agency.
• Congressional Oversight: Congress has the authority to oversee the IRS and hold it accountable for its actions. Congressional committees regularly conduct hearings and investigations to examine IRS policies and practices.

Understanding the role of each type of oversight helps give a view of what is actually happening and what is merely a claim.

In conclusion, the debate over increased IRS audits on small businesses must take into account important factors such as the increased oversight and different groups tasked with watching their actions. It is important to evaluate how these factors should influence whether you believe the claims.

Analyzing IRS Audit Trends and Priorities

To properly analyze the 50% increase in audit claims, it makes sense to look at the historical audit trends to see how the IRS has worked. Has there been any noticeable shift over time?

Analyzing the trends and priorities can also help one glean what is likely to occur in the future.

Historical Audit Rates for Small Businesses

Over the past decade, the audit rates for small businesses have generally been low. According to IRS data, the audit rate for small businesses with assets under $10 million has hovered around 1% or less. The audit rate declined during the 2010s because of a number of retirements and the fact that positions the retiring people held were not filled. This decline can be attributed to budget constraints, resource limitations, and changing enforcement priorities. While the budget is increasing, there is no credible data source that suggests the audit rates will change by 50% in any given year.

• Budget Cuts and Resource Limitations: In recent years, the IRS has faced significant budget cuts and resource limitations which have limited its ability to conduct audits. This resulted in fewer audits overall, including those targeting small businesses. While the IRS has suffered from severe budget cuts in some years, the amount of funding for the future is pretty clear.
• Focus on High-Income Taxpayers and Corporations: Due to limited resources, the IRS has generally focused its audit efforts on high-income taxpayers and large corporations. These audits tend to yield higher returns in terms of recovered tax revenue; this focus on high-income taxpayers is likely to continue in the future.
• Shifting Enforcement Priorities: In recent years, the IRS has shifted its enforcement priorities to address emerging tax challenges such as offshore tax evasion, digital currency transactions, and cybersecurity threats. The focus of the IRS is really on the wealthiest and the tax laws are constantly changing.

Those who are making the claims about IRS increases are probably assuming any increased revenue will be focused on small businesses. The evidence, however, indicates the money will be used to address other issues.

IRS Priorities and Enforcement Strategies

The IRS enforcement strategies are guided by several key priorities, including maximizing tax compliance, addressing tax avoidance schemes, and protecting taxpayer rights. How will this translate into activity and could this affect small businesses?

• Data Analytics and Risk Assessment: The IRS uses data analytics and risk assessment techniques to identify taxpayers who are most likely to be non-compliant. This allows the agency to focus its audit resources on the most productive cases.
• Targeted Audits and Compliance Initiatives: The IRS conducts targeted audits and compliance initiatives to address specific areas of tax non-compliance. These initiatives may focus on industries, occupations, or transaction types with a high risk of tax evasion. The IRS wants to focus on the areas where it can collect the most revenue and these frequently change.
• Collaboration with Other Agencies: The IRS collaborates with other government agencies, both domestically and internationally, to combat tax evasion and money laundering. These partnerships enable the agency to share information, coordinate enforcement efforts, and pursue complex tax cases across borders.

By understanding IRS enforcement strategies and priorities, you can better assess the likelihood in the claims being made about the 50% increase. Knowing the facts can help to eliminate some of the fear that has caused some small business owners to be concerned.

Examining the Basis for the “50% Increase” Claim

What are the sources of this “50% increase in audits?” Understanding the numbers is very important!

It is important to carefully examine the sources and data behind the claim that the IRS will increase audits on small businesses by 50% in 2025. This will help to determine whether the claims are based on credible evidence or mere speculation.

Sources of the Claim and Their Credibility

The claim that the IRS will increase audits on small businesses by 50% in 2025 has originated from various sources, including media reports, political commentary, and social media posts. Many of these sources cite an agency report which they have apparently misinterpreted. It’s important to assess the credibility of these sources and evaluate the data they present.

• Credible News Outlets: Reputable news organizations conduct thorough fact-checking and rely on reliable sources of information. If they have reported on the claim, it is important to examine their findings and assess the evidence they provide.
• Political Commentators and Advocacy Groups: Political commentators and advocacy groups may have a vested interest in shaping public opinion on tax policy and IRS enforcement. Their statements should be scrutinized carefully for bias or exaggeration.
• Social Media Posts and Online Forums: Social media posts and online forums can be a breeding ground for misinformation and speculation. Claims made on these platforms should be treated with skepticism and verified through reliable sources.

Check to see if the source has a bias related to tax revenue or the IRS in general. Claims should always be taken with a grain of salt.

Data and Evidence Supporting or Refuting the Claim

To determine the validity of the claim regarding increased IRS audits on small businesses, it is important to examine the data and evidence supporting or refuting it. Where are the numbers coming from?

• IRS Data and Reports: The IRS publishes data and reports on its enforcement activities, including audit statistics, tax collection figures, and compliance initiatives. These sources can provide valuable insights into the agency’s audit trends and priorities.
• Independent Studies and Analyses: Independent research organizations and think tanks often conduct studies and analyses of tax policy and IRS enforcement. These reports can offer objective assessments of the agency’s performance and impact on taxpayers.
• Government Accountability Office (GAO) Reports: The GAO is an independent agency that audits and evaluates government programs and agencies, including the IRS. GAO reports can provide valuable oversight and recommendations for improving IRS operations.

If the claim regarding a 50% increase in audits is not supported by credible data and evidence, it should be treated with caution.

Impact of Increased Audits on Small Businesses

Even if the 50% increase claim is false, it is still important to understand what the impact of any increase may be. Most small businesses operate on a slim profit margin so any large surprises will likely hurt them. What would be the impact on small business owners if the claim were true?

It is important to consider the consequences of increased audits on small businesses, including the financial burden of compliance, the potential for business disruption, and the impact on business owners’ stress and anxiety levels. To properly prepare, one must begin by understanding the worst case scenario.

Financial Burden of Compliance

Responding to an IRS audit will typically require a financial outlay, even if one is in full compliance with tax laws. Small businesses may face significant financial burdens as a result of increased IRS audits. These burdens can include:

• Professional Fees: Small businesses typically hire tax professionals, such as accountants or tax attorneys, to represent them during an IRS audit. These professionals charge hourly fees for their services, and the cost can quickly escalate, especially if the audit is complex or prolonged.
• Time and Resources: Preparing for and responding to an IRS audit can require a significant investment of time and resources. Small business owners may have to spend hours gathering documents, answering questions, and attending meetings with IRS auditors.
• Potential Tax Assessments: If the IRS finds errors or discrepancies during an audit, the business may be assessed additional taxes, penalties, and interest. These assessments can put a significant strain on the business’s finances and may even threaten its survival.

For many small businesses, the financial burden of compliance with IRS audits can be a significant challenge. If there are plans for a business in the future, it doesn’t hurt to prepare for this contingency.

Business Disruption and Productivity Losses

Increased IRS audits can also lead to business disruption and productivity losses for small businesses. IRS audits can disrupt normal business operations and divert resources away from core activities. Small business owners may have to spend time away from their businesses to deal with audit-related matters, resulting in lost productivity and revenue. This especially affects the owners of small businesses, who frequently perform multiple tasks.

• Employee Morale and Turnover: IRS audits can cause stress and anxiety among employees, leading to decreased morale and increased turnover. Employees may worry about their own tax compliance or fear that the business is in financial trouble.
• Reputational Damage: IRS audits can damage a small business’s reputation, especially if the audit becomes public. Customers and suppliers may lose confidence in the business, leading to decreased sales and business opportunities.

Being prepared for any eventualities will always pay off in the long run.

Strategies for Small Businesses to Prepare for IRS Audits

While it is not prudent to prepare for something that is not expected to happen, one should always be prepared for a future audit.

The best way small businesses can protect themselves is by implementing strategies to prepare for IRS audits. These include maintaining accurate records, seeking professional tax advice, and understanding taxpayer rights.

Maintaining Accurate Records and Documentation

One of the most important steps small businesses can take to prepare for IRS audits is to maintain accurate records and documentation. This includes:

• Keeping complete and organized financial records: Small businesses should keep detailed records of all income, expenses, assets, and liabilities. These records should be organized in a clear and consistent manner, making it easy to locate information when needed.
• Retaining supporting documents: Small businesses should retain all supporting documents, such as receipts, invoices, bank statements, and contracts. These documents can help to substantiate the information reported on tax returns.
• Using accounting software or hiring a bookkeeper: Small businesses should consider using accounting software or hiring a bookkeeper to help them manage their financial records and ensure accuracy.

Keep in mind that what you are doing now will prepare you best for the future; don’t wait until the end of the tax year to start working on preparing your taxes! Being prepared will bring you the most benefits.

Seeking Professional Tax Advice and Guidance

Small businesses should also seek professional tax advice and guidance to help them navigate the complexities of tax law and prepare for IRS audits. This includes:

• Consulting with a qualified tax professional: Small businesses should consult with a qualified tax professional, such as a certified public accountant (CPA) or tax attorney, to help them understand their tax obligations and develop a tax plan.
• Staying informed about tax law changes: Small businesses should stay informed about tax law changes and how they may impact their business. Tax professionals can help them stay up-to-date on the latest developments in tax law.
• Seeking representation during an audit: If a small business is selected for an IRS audit, they should seek representation from a qualified tax professional. A tax professional can help them understand the audit process, prepare for meetings with IRS auditors, and protect their rights.

As with any business task, use all professionals that are available to keep your business running smoothly!

FAQ

Conclusion

In conclusion, while concerns about increased IRS audits are understandable, the claim that audits on small businesses will increase by 50% in 2025 appears to be without merit. Small businesses can best protect themselves by maintaining accurate records, seeking professional tax advice, and understanding their rights.