In recent years, exam coverage for business tax returns has been at a rate of about 0.5%, which some tax experts have described as “an all-time low.” However, with the recent passage of the Inflation Reduction Act, an increase in audits is inevitable, and businesses should begin to prepare for this change.

Why Audit Rates Have Been So Low

For years, the Internal Revenue Service (IRS) has been understaffed and underfunded, so the IRS runs in ways that would shock the average business owner. For example, as reported by the Washington Post, the IRS staff hand-reviews returns and types information into computers. They rely on mail and faxes for communication with taxpayers. They use equipment made in the 1970s—so old that they can no longer buy replacement parts when it breaks. The result is that the agency has a backlog for processing millions of returns.

At the same time, the number of business filings has skyrocketed. In 1980, just over 3 million business returns were filed. By 2015, there were more than 35 million business returns. Neither the staff nor the facilities have increased enough to handle that eleven-fold jump in filings.

The Budget Increase

The newly passed Infrastructure Act includes $80 billion for the improvement of the IRS. This money can be used to hire new agents over the next decade, as well as allow the IRS to purchase new equipment and modernize the way the IRS processes filings.

Businesses won't necessarily see an immediate dramatic change. The money hasn't yet been issued due to legislative issues. And—even with the money to hire new accountants and investigators, it doesn't mean the IRS will be able to find and hire qualified staff.

However, the federal government knows that it is losing revenue by its agency's own failures, and it must change.

That's why, even if we don't yet know when we'll start to see the full effects of this new funding, businesses should start anticipating more thorough reviews will begin at any time.

If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.