The tax code is complex, and even careful businesses can uncover mistakes years later. These issues surface in IRS audits and in transactions—where unresolved tax exposure can reduce value or disrupt a deal. Some owners choose to wait for IRS contact, but that can be costly. IRS notices have strict deadlines and missed responses can forfeit appeal rights while penalties and interest may continue to grow.
A shifting IRS enforcement environment
The IRS continues to face resource and operational pressures, including staffing declines, leadership turnover, and the demands of implementing major legislation. Yet fewer personnel may not necessarily mean fewer audits. IRS leadership has emphasized that digital modernization and AI are now central to enforcement, enabling the agency to identify complex structures and hidden income with far greater precision.
Proactive resolution
Businesses do not need to wait for certainty. The IRS has numerous programs to encourage voluntary compliance. The following are some to consider:
- Information reporting closing agreement. Small, widespread reporting mistakes affecting many information returns can be resolved through a closing agreement with the IRS. If taxpayers come forward voluntarily, these agreements can potentially lower liability exposure and save both payers and payees from filing corrected or amended returns, reducing significant administrative burden.
- Request a letter ruling or closing agreement. Taxpayers may obtain the IRS’s position or a binding agreement on eligible issues for a completed transaction or proposed transaction. Because these options generally end once an issue is under examination, timing is key.
- Pre-Filing Agreement (PFA) Program. For large businesses, the PFA program allows resolution of specific issues before filing a return. The IRS conducts a focused review, and a business can gain certainty for not just the current year but also for four years in the future.
- Voluntary Disclosure Practice (VDP). If a taxpayer has willfully failed to comply with tax obligations, the IRS Voluntary Disclosure Practice provides a structured pathway to resolve noncompliance and limit criminal exposure. Waiting can increase risk; proactive disclosure could significantly alter outcomes.
- Employee Retention Credits. The IRS is permitting withdrawal of certain Employee Retention Credit claims that have not yet been paid or checks received but not deposited. Withdrawn claims are treated as if never filed, and penalties and interest are not imposed. Acting early can prevent a more burdensome examination.
Certainty as strategy
Tax risk is enterprise risk. In a data-driven enforcement environment, proactive engagement can preserve value, reduce uncertainty and prevent manageable issues from becoming costly disputes. The most effective audit strategy may be ensuring the audit never happens.