Prepare for Tax Audits Ahead of 2026

Following two months of budget cuts, the IRS has seen a significant decrease in its tax auditors. DOGE’s initiative to reduce costs has targeted the IRS, aiming to slash up to 40% of its staff in the current year. A recent report by the Treasury Inspector General for Tax Administration (TIGTA) revealed that the IRS has already lost around 11% of its workforce by the end of March. Following significant budget cuts, the IRS experienced a substantial decrease in its tax auditors for running tax audit within a short timeframe. A notable impact was felt among revenue agents who specialize in conducting audits. A report revealed that approximately 31% of these workers, totaling around 3,600 auditors, either opted for the deferred resignation plan or were terminated during the initial quarter of 2025.

Regardless of recent news on disruption in the IRS, filing your annual tax return is a crucial part of filing your individual taxes and running a business, but it can also bring a little bit of anxiety, especially when you think about the possibility of a tax audit. While no one can guarantee you won’t face a tax audit, being prepared early is one of the absolute best ways to minimize your risk and make the process smoother if one does happen. The tax return you file in 2026 will cover your business activity for the 2025 tax year, and with potential shifts in the tax landscape on the horizon, getting ready now is a smart move.

Here are some critical ways you can prepare early to minimize your risk of a tax audit when filing your 2026 tax return:

1. Prioritize Impeccable Record-Keeping

This is arguably the most critical step. The IRS requires you to be able to prove all deductions you take. More stringent substantiation rules apply to certain expenses, such as travel, meal, and entertainment expenses, and business gifts. For these, you need to document the amount, date, place, business purpose, business benefit, and the business relationship of the person for whom expenses were incurred.

For automobiles used for business, keeping a daily log of business mileage and expenses is highly recommended, as written records are viewed more favorably by the IRS than oral testimony, and records compiled at the time are preferred over those constructed later. If you use the standard mileage rate, this log is essential for substantiating your business miles.

For charitable contributions, the IRS has specific documentation requirements depending on the amount and type of contribution. For non-cash gifts over $500, you need to combine claimed deductions for all similar items of property donated to any charitable organization during the year to determine documentation needs. Gifts over $500,000 require a qualified appraisal attached to the return and a completed Form 8283 (Section B). Proper documentation for services provided to a charity, including unreimbursed out-of-pocket expenses, is also necessary.

In areas like cryptocurrency transactions, compliance can be complex due to limited IRS guidance, and proper record-keeping is crucial to support your reported transactions. The final tangible property regulations provide tax guidance on determining whether costs are currently deductible repairs or capitalizable improvements, and complying with these rules requires proper documentation. Maintaining records of your at-risk amount in business activities is also important.

Keeping organized records throughout the year, rather than scrambling at tax time, helps ensure you have the documentation needed to support every item on your tax return, which is your primary defense in a tax audit.

2. Ensure Accuracy in Income Reporting to Avoid Tax Audit

Make sure you are capturing and reporting *all* sources of business income. This includes income from traditional sales, services, investments, and any other sources. Discrepancies between income reported by third parties (like banks or payment processors) and what you report on your tax return are common tax audit triggers.

For individuals with income above certain thresholds, the 3.8% Net Investment Income Tax (NIIT) applies to net investment income. This includes most interest, dividends, royalties, rents, and income from passive activities. Be sure to consider applying tax on your net investment income when making estimated tax payments. Reporting all investment income correctly helps prevent issues with the NIIT.

If you pay estimated taxes quarterly, a mid-year review helps you compare actual performance to projections and adjust payments if needed to avoid underpayment penalties. Accurate income reporting is fundamental to calculating estimated taxes correctly.

3. Properly Substantiate All Tax Deductions and Tax Credits

While record-keeping is key to substantiation, understanding *what* can be deducted and the specific rules is equally important. Incorrectly claiming deductions or credits is a common reason for a tax audit.

For example, the Qualified Business Income (QBI) deduction, while complex with limitations based on taxable income, W-2 wages, and property basis, can significantly lower your tax liability. Ensuring your business activities qualify and that you’re properly tracking income and expenses for this deduction is vital. Note that the QBI deduction reduces taxable income but doesn’t affect limitations based on adjusted gross income (AGI), and it’s available whether you itemize deductions or not.

If you use a portion of your home exclusively and regularly for business, you may be able to deduct home office expenses if you are self-employed. This deduction was suspended for employees by the TCJA through 2025, but the rules did not change for self-employed individuals. Make sure you meet the criteria to claim this deduction.

Understanding the passive activity rules, which prevent using losses from passive investments or tax harvesting to reduce other taxable income, is also important. If you intend to show that a business activity is nonpassive, keep accurate records of your time and work in that business. The excess business loss limitation also applies to noncorporate taxpayers and limits the deductibility of certain trade or business losses through 2028. For 2024, losses over $305,000 ($610,000 for married filing jointly) may be limited. Be aware of these limitations.

Accelerating capital expenditures and placing assets in service before the end of 2026 could allow you to benefit from bonus depreciation rates. However, complex rules apply to depreciation, including limits on vehicles.

Ensuring you meet all requirements and have documentation for every deduction and credit you claim on your tax return significantly reduces your tax audit risk.

4. Confirm Filing Status and Personal Information to Avoid Tax Audit

Your filing status (Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Surviving Spouse) impacts your tax rate brackets and standard deduction amount. For 2025, the standard deduction amounts are set, and taxpayers will get bigger standard deductions, though with smaller boosts than in recent years. Choosing the correct filing status is fundamental to an accurate tax return. Married individuals may need to compute taxes both jointly and separately to see which results in less tax. Filing separately can impact eligibility for certain tax credits.

Ensuring accurate Social Security Numbers (SSNs) for yourself, your spouse, and dependents is also vital, especially for claiming tax credits like the Child Tax Credit.

5. Work with a Qualified EasyTax USA Tax Professional

Navigating the U.S. tax code can be complex, especially for businesses, and potentially significant tax law changes loom after 2025 due to the TCJA sunset. A dedicated EasyTaxUSA Tax Professional can help ensure your tax return is prepared accurately, identify potential errors before filing, help you comply with complex rules, and advise on strategies to maximize your tax position while minimizing audit triggers. They can also represent you if you do face a tax audit.

Conclusion

Filing your 2026 tax return for the 2025 tax year is a significant task. While the major scheduled tax law changes from the TCJA sunset don’t take effect until after the 2025 tax year, accurately filing this final year under the current rules is paramount. By preparing early – focusing on meticulous record-keeping, accurate income reporting, substantiating deductions and credits properly, confirming personal details, and considering professional help – you can significantly reduce your risk of a tax audit and gain peace of mind. 

This entry was posted on Thursday, May 22nd, 2025 at 8:00 am and is filed under Tax and Life Changes, Tax Deductions and Credits, Tax News, Tax Tips and Tricks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.