10 Ways Tax Planners Can Prepare for Increased IRS Focus on Documentation During Audits - 03-15-25

The IRS is ramping up scrutiny of high-net-worth individuals and businesses, increasing audit rates by over 50% for those earning above $10 million. Recent IRS initiatives backed by Inflation Reduction Act funding have intensified enforcement on wealthy taxpayers, large partnerships, real estate investors, and tech businesses. IRS agents are digging deeper during audits and expecting taxpayers to produce more documentation to support every position on their returns. To help clients navigate this environment, tax planners must take proactive steps to bolster documentation and audit readiness.

Listen in as we go over ten authoritative strategies, complete with industry examples, IRS policy references, and best practices, to prepare for the increased IRS focus on documentation!

This podcast is meant for entertainment purposes only. For the more thorough, complete, and accurately written version of this article which includes citations, visit us at http://www.tottb.tax

Transcript

Okay. So, like, imagine this, you're just, you know, going through your mail, and then bam. There it is. A letter from the IRS. Oh, no.

Right. Audit time. Yeah. Nobody wants that. Not the kind of mail anybody's happy to see.

But, that's what we're gonna talk about today on this deep dive. We're gonna kinda get you ready for that possibility, especially if you're dealing with the kind of finances that tend to draw the IRS's attention. That's right. Yeah. We're talking about high net worth individuals and businesses.

Yeah. The kind of folks that the IRS is really looking at lately. Yeah. And we're talking about a huge jump in audits, like, a 50% increase. Wow.

For those earning over $10,000,000, 50 percent, that's a big jump. Yeah. It really is. And what's interesting is the IRS is getting a lot more strategic about who they're auditing. Mhmm.

It's not just random anymore. So they're not just, like, throwing darts at a board and seeing who they hit. Right. Exactly. Yeah.

They're using some really sophisticated tools to choose their targets. Like what? Spill the tea? Well, think data analytics and AI. Yeah.

The IRS is actually using algorithms to pinpoint returns. They're statistically more likely to have issues, and they're even using AI to analyze huge amounts of data Yeah. You know, uncover patterns that might point to tax evasion or fraud. So it's not just random selection anymore. It's strategic.

Very strategic and very tech savvy. Oh, wow. And that's exactly why we're diving deep into this source material today. The 10 ways certified tax planners can prepare for increased IRS, focus on documentation during audits. Okay.

This is where the real experts, the ones who are dealing with these audits every single day, are sharing their secrets. Alright. So let's jump into what's the first thing that these tax planners are emphasizing? Well, think of it this way. The best defense is a good offense.

Yeah. Right? Right. So before the IRS even comes knocking, you need to do your own internal pre audit. You know, it's like giving your finances a thorough checkup.

Okay. I like that. A financial checkup. Exactly. But what does that actually look like?

So let's say you're part of a high net worth family with multiple businesses, trusts, investments, all those different things. Right. The IRS wants to see a really clear and updated map of how all those entities are connected. Okay. So you know those organizational charts that a lot of people just see as a formality?

Yeah. Well, they're actually crucial if the IRS comes knocking. So it's not just a formality. It's super important to have. It's really important.

It's all about demonstrating transparency and organization right from the get go. Got it. So internal pre audit organizational charts. What else should we be thinking about when it comes to staying ahead of the IRS? Documentation.

Yes. Documentation. Documentation. I know it sounds boring, but it's truly the foundation of audit readiness. Okay.

So we're talking receipts, invoices, contracts, the whole nine yards. Absolutely. Everything. You get it every single deduction or credit that you claim needs to be backed up by a solid documentation. Right.

No more, you know, rounding up those charitable donations or ballparking those business expenses. The IRS wants to see the actual receipts. Oh, okay. Point taken receipts are my new best friend, but how long do we need to keep all this stuff? My filing cabinet is already overflowing.

Yeah. I hear you. But trust me, it's better to be safe than sorry. Okay. The general rule is three years.

But for high net worth individuals and businesses, experts are recommending at least seven years and even longer for certain things like real estate. Seven years. So I'm gonna need a bigger filing cabinet, or maybe I should invest in a scanner. Well, technology can definitely be a lifesaver when it comes to record keeping. Yeah.

But, you know, back to the real estate example. Think about this. If you sell a property ten years down the line, you'll need those original purchase documents to prove your cost basis when you calculate your gain or loss. Okay. So that's why those real estate records need to be kept for so long.

Exactly. You need that paper trail to back up your story years later. Okay. And the thing is the IRS isn't just casting a wide net here. They're also focusing on specific industries where they see a higher risk of tax issues.

So the IRS is playing favorites now? Well, favorites might not be the right word, but they definitely have certain industries in their crosshairs. Like who? Give us the rundown. Like who?

Give us the rundown. Real estate's a big one. They're really scrutinizing anyone claiming rental losses, especially when it comes to proving material participation. Okay. Break that down for me.

What does material participation even mean in the real estate world? So, basically, you can't just passively own a property and write off all the expenses you have to actually prove you're actively involved in managing it. It. You know, the IRS wants to see those detailed time logs showing how many hours you're spending on things like finding tenants or making repairs or handling those, you know, late night plumbing emergencies. So you can't just collect rent checks and call it a day.

No. You gotta be hands on. You really gotta be hands on. I guess those detailed logs we talked about earlier are even more important for real estate investors. Absolutely.

And it's not just real estate. Private equity and partnerships are also getting a lot of attention, especially when it comes to, you know, how income is being allocated. The IRS is really on high alert for any, any funky business when it comes to partnership agreement. Funk of business. Like, what give me an example.

So let's say you've got a family limited partnership, and you're using it to reduce your tax liability, which is perfectly legal, by the way, as long as it's done right. Yeah. But the IRS is gonna wanna see that every transaction is documented, every allocation is justified. You know, everything is above board. So those complex partnership agreements, they're not just for show.

They're your shield against an IRS audit. Exactly. And then there's the wild world of tech. The IRS, you know, they know fortunes are being made and lost at lightning speed in this industry, and they're trying to keep up. I bet crypto's keeping them busy.

Oh, you bet it. Stock options, r and d credits those crazy fluctuations in crypto prices. It's a whole new ballgame for the IRS. Yeah. They're, you know, digging deep into blockchain records, scrutinizing those r and d claims, making sure those crypto transactions are being reported accurately.

It sounds like the IRS is finally getting hip to the digital age. They have to. The world is changing, and they're adapting, but that doesn't mean they forgot about those good old fashioned offshore accounts. Wait. You mean those hidden accounts in tropical tax havens?

I thought that was just a Hollywood plot line. Think again. The IRS is cracking down on international tax compliance like never before. Foreign bank accounts, entities trusts, even those tricky transfer pricing schemes. They're leaving no stone unturned.

So there's no escaping the IRS even if you're a jet setting entrepreneur with a secret Swiss bank account? Nope. They're collaborating with international authorities, sharing information, and closing those loopholes. Wow. It sounds like the IRS has really stepped up its game.

But let's be honest, keeping track of all this stuff can be a real headache. There's gotta be a better way. You're right. And, thankfully, technology can be a huge help when it comes to managing all this documentation. Okay.

I'm all ears. Give me the tech solutions. Well, first off, ditch those overflowing filing cabinets and embrace the digital world cloud storage systems and client portals are lifesavers. You can scan all those receipts, invoices, bank statements, everything, and have it all neatly organized and accessible at your fingertips. So no more panic attacks trying to find that one crucial document when the IRS comes knocking.

Exactly. And, you know, those amazing expense tracking apps that we all rely on for business trips Oh, yeah. They're a game changer for personal finances too. Snap a photo of the receipt, categorize it, and boom, it's logged and ready for tax time. I love those apps.

They make expense reports so much less painful. But what about security? All this digital information floating around makes me a little nervous. You're right to be concerned. Data security is absolutely paramount.

Make sure you're using strong passwords, encrypted communication channels, and reliable data backup systems. You don't wanna lose everything to a hacker or corrupted hard drive. Good point. So we've got our digital systems in place. We're meticulously documenting everything.

Are we officially audit ready now? We're getting there. But remember, even with the best technology, it all comes down to people. Wait. You mean me?

What do I need to do? Even the most brilliant tax planner can't help you if you're not giving them accurate information. You need to be organized and communicate clearly with your advisers, make sure they have everything they need to prepare your returns accurately. So no more shoebox full of receipts at tax time? That's exactly.

It's a team effort. Stay organized, communicate clearly with your advisers, and make sure they have everything they need to prepare your returns accurately. So it's all about being proactive and building a strong relationship with my tax team. But let's face it. Even with the best preparation audits can still happen.

What happens if that dreaded letter arrives in the mail? What should I do? Don't panic. That's where having a solid plan in place becomes even more critical. It might seem daunting, but, really, it's about being prepared.

You're not terrified. Right. The first step is simple. Respond to the IRS promptly. Make sure your information is organized.

No last minute scrambling. K. So stay calm and collected. What else? Having a designated audit response team can make all the difference.

You know, it's like having a playbook ready to go for any scenario. So, like, a financial SWAT team? Uh-huh. Well, maybe not that dramatic. Okay.

But you get the idea. You want a point person or a team, you know, that's ready to handle all communication with the IRS and, you know, ensure a smooth process. Got it. Communication and organization. What about all that documentation we've been talking about?

That's where it really pays off. Remember that audit dossier we talked about? Yeah. All those meticulously organized records. They'll be your best friend.

You'll be able to, you know, quickly pull the necessary information and present it to the IRS in a clear and concise manner. It sounds like being audit ready is all about anticipating the IRS's needs and giving them what they want. No surprises. Precisely, it's about taking a proactive approach, documenting everything, and presenting it all, you know, in a professional and transparent way. Makes the whole process hopefully a little less painful.

But let's be real, sometimes tax situations can get pretty complicated. What happens when those tricky issues come up? That's when you call in the specialists. Remember that financial of interest team we talked about? Yes.

Our tax superheroes. When do we assemble the team? Well, let's say you have a unique asset, like a valuable piece of art or a family business or real estate in a volatile market. You might want to bring in a valuation expert. Okay.

They could help determine the fair market value and provide documentation to support your assessment, you know, in case the IRS questions it. Makes sense. You don't wanna get into a debate with the IRS about the value of your prized Picasso. Who else should be on speed dial? If you're dealing with international investments or entities, an international tax attorney or CPA is essential.

They can guide you through the, you know, complexities of foreign tax compliance and help ensure you're meeting all the necessary reporting requirements. Okay. International experts for global dealings. What about for us regular folks running businesses here in The US? Well, if you're a business owner, an employment tax specialist can be a lifesaver.

They can help you navigate the tricky waters of worker classification and make sure, you know, your employment tax documentation is squeaky clean. Okay. So employment tax specialists for those sticky worker classification questions, anyone else we should have on our radar? Sometimes even with the best preparation, an audit can get, you know, complicated or contentious in those situations. You might wanna consider bringing in a tax controversy expert.

So they're like the seasoned negotiators of the tax world ready to go toe to toe with the IRS. You could say that they can help you communicate effectively with the IRS, respond to any allegations, and, you know, protect your rights throughout the process. So we've got our valuation experts, our international tax gurus, our employment tax specialists, and our tax controversy negotiators. Our financial dream team is ready for anything. But how do we know when it's time to assemble the troops?

Well, it's always a good idea to consult with specialists early on, especially if you have complex transactions or areas of your tax return that might raise red flags. Okay. Remember, the IRS is looking for inconsistencies or anything that might suggest an attempt to avoid paying taxes by involving specialists, you demonstrate that you've taken the necessary steps to ensure compliance. So it's not just about being right. It's about being able to prove you're right.

And having those experts on your side adds a lot of credibility. Exactly. It's about being proactive and mitigating risks. Yeah. You know, before they become major problems.

It seems like the overall theme here is preparation being audit ready isn't about trying to outsmart the IRS. It's about being organized and transparent and having the documentation to support your claims. You've hit the nail on the head. It's about approaching your financial life with an audit ready mindset. So for our listeners who are maybe just starting to think about audit readiness, what's the first step?

Start by honestly assessing your current record keeping practices. Ask yourself if the IRS audited me tomorrow, would I be able to confidently provide them with the documentation they need? That's a great question to ask yourself. And if the answer is no or even maybe don't worry, we've given you a road map to get started. Absolutely.

Remember, the IRS doesn't expect you to be a tax expert, but they do expect you to be organized, transparent, and prepared. Great advice. Well, I think that about wraps up our deep dive into IRS audit readiness. We hope you found it informative, maybe even a little empowering. Yeah.

It's been a pleasure unpacking this topic with you. And to our listeners, remember, knowledge is your best defense when it comes to the IRS. Stay informed, stay organized, and stay ahead of the game now that you know what the IRS is looking for. Are there any areas in your financial life where you might need to beef up your documentation, maybe those home office deductions or charitable donations or even those crypto transactions could use a second look in a moment to think about it. And that's all for this deep dive.

Until next time.