IRS Enforcement is Back: What Business Owners Need to Prepare For in 2026

IRS enforcement activity is increasing again, and business owners should expect more audits and compliance reviews in 2026. According to John Malone, JD at Anomaly CPA, the Internal Revenue Service is expanding enforcement programs focused on pass-through entities, high-income taxpayers, and complex tax deductions. Much of this activity follows additional IRS funding and modernization initiatives authorized by Congress. Businesses implementing proactive planning through advanced tax strategy can reduce audit exposure while improving compliance. The IRS has already begun increasing audit rates among higher-income taxpayers and large partnerships (Source: IRS Strategic Operating Plan, 2023). As enforcement resources expand, business owners should prepare for more scrutiny around deductions, entity structures, and tax reporting accuracy. 

Why IRS enforcement is increasing

The IRS significantly reduced audit activity during the past decade due to funding and staffing limitations.

Congressional funding increases are now allowing the agency to rebuild enforcement teams and modernize its technology systems.

The IRS Strategic Operating Plan outlines a multi-year initiative to increase audit coverage among high-income taxpayers and complex business entities.

In particular, the agency is targeting areas where underreporting is more likely to occur, including pass-through entities, partnership structures, and certain tax credits (Source: IRS Strategic Operating Plan, 2023).

Key takeaway: Increased funding and modernization efforts are enabling the IRS to expand enforcement activities across complex business tax filings. 

‍Which businesses are most likely to face audits

While most small businesses will not face audits, certain categories carry higher risk.

Businesses reporting over $10 million in assets are receiving increased scrutiny as the IRS rebuilds its Large Business & International division enforcement programs.

Pass-through entities such as partnerships and S corporations are also a focus because they represent a large share of U.S. business income.

According to IRS data, pass-through businesses now account for more than 60% of U.S. business income (Source: IRS Statistics of Income Division).

Key takeaway: Partnerships and pass-through businesses are increasingly becoming the focus of IRS audit activity. 

The deductions and credits drawing the most scrutiny

Certain deductions and credits frequently attract IRS attention, including the research and development tax credit, large business expense deductions, and complex depreciation strategies.

Businesses claiming the R&D tax credit must document qualified research activities and associated costs carefully.

Definition — Internal Revenue Code §41 Research and Development Credit

Internal Revenue Code §41 provides a federal tax credit for companies that incur qualified research expenses while developing or improving products, software, or processes. Eligible costs may include wages, supplies, and certain contract research expenses tied to technological innovation. Because the credit directly reduces tax liability, it often receives heightened review during audits (Source: IRS Notice 2023-63).

Key takeaway: Credits and deductions that directly reduce tax liability are more likely to receive detailed IRS scrutiny. 

Real-world example: how enforcement affects a growing business

Consider a software company structured as an S corporation.

The company reports $2.2 million in annual revenue and claims a $180,000 research tax credit based on internal software development.

During an audit review, the IRS requests documentation for employee wages, development activities, and project records supporting the credit claim.

Because the business maintained detailed documentation, it successfully verifies the qualified research expenses.

Assumptions:

Example reflects typical structures observed among technology companies (Based on anonymized Anomaly CPA client data, Q4 2024).

Verification:

Audit procedures follow documentation requirements outlined in IRS Notice 2023-63.

Key takeaway: Businesses with strong documentation can withstand audits while preserving valuable tax credits. 

How business owners should prepare for 2026

Preparing for increased enforcement starts with improving tax documentation and reporting accuracy.

Businesses should maintain clear records supporting deductions, credits, and payroll reporting.

Regular tax planning reviews can also identify areas where compliance risks may exist.

Technology tools and modern cloud accounting systems can simplify documentation and audit preparation.

Working with experienced tax advisors ensures businesses remain compliant while still taking advantage of legitimate tax benefits.

Key takeaway: Proactive compliance and strong documentation significantly reduce risk during IRS audits. 

Frequently asked questions about IRS enforcement

Is the IRS increasing audits in 2026?

Yes. The IRS Strategic Operating Plan outlines expanded enforcement efforts targeting high-income taxpayers and complex business structures.

Which businesses face the highest audit risk?

Businesses with high income, large partnerships, and complex deductions are more likely to face audits.

What records should businesses keep for IRS compliance?

Businesses should maintain payroll records, expense documentation, contracts, and supporting materials for any credits or deductions claimed.

Are tax credits more likely to be audited?

Yes. Credits that directly reduce tax liability often receive additional scrutiny during IRS examinations. 

Action steps for business owners

●      Maintain detailed documentation for deductions and tax credits.
●      Conduct annual tax planning reviews with a CPA.
●      Implement modern accounting systems to track financial records.
●      Review entity structure and reporting compliance annually.
●      Prepare organized documentation in case of audit inquiries.