The Internal Revenue Service recently announced its plans to significantly increase audits on the wealthiest taxpayers, large corporations and large, complex partnerships for tax year 2026.
Audit rates will rise by more than 50% for those with total positive income over $10 million (up from an 11% coverage rate in 2019 to 16.5% in tax year 2026). That news is sure to trigger anxiety in some high-net-worth earners.
But an IRS audit is more of an exercise that seeks documentation; it’s not necessarily an accusatory event. They just want to see your clients’ homework to show how they got their answers.
Dot i’s, Cross t’s
Taxpayers should be able to explain and justify their tax positions and investments to the IRS. Proper documentation is crucial, and I advise clients to prioritize it. I tell them to make a note of what they do and when they do it. This way, they have their homework in place and ready to show the IRS if it’s needed. They should start a file or folder that includes all the forms and documents that explain their financial actions.
The documentation should answer these questions:
- What did you do?
- How did you do it?
- Why did you do it? And;
- What documents do you have that support what you did?
Some of the wealthiest people are inherently risk-takers. Translating this to tax planning, they aim to take a calculated risk and say, “Do I have a position here? Can I document this position that gives me the ability to make an argument to the IRS on why this position works? Do I have enough documentation to support it?”
Next time a client hears the word “audit,” they should consider it a tool that IRS employees use to check their homework. Make sure they did theirs.
Practices that Could Trigger an Audit
While there are many honest reasons someone might omit or forget some income received, those instances rarely border on criminal or wrongful intent. But illegal practices, such as fabricating documents, taking deductions that aren’t allowed or making up different types of expenses that didn’t occur, can spell trouble.
Here are six items that could draw the IRS’ attention:
Matthew Chancey (matthewchancey.com) is a Certified Financial Planner and the author of Tax Alpha Solutions: Effective Tax Management Strategies For High-Net-Worth Investors.