ARTICLE | October 16, 2024
Authored by RSM US LLP
The IRS is intensifying its scrutiny of corporate tax returns with an ambitious plan to triple audit rates for large corporations by 2026. By leveraging artificial intelligence, the IRS is more equipped than ever to identify red flags. Understanding these triggers can help your corporation stay compliant and reduce the risk of costly audits.
Trigger #1: Inadequate documentation
Poor or incomplete documentation is a major red flag for IRS auditors, especially when it comes to large deductions or credits. The IRS’ use of AI means that even minor gaps in data can be quickly identified and flagged for further review.
- Why it matters: Inadequate documentation can lead to heightened scrutiny and the potential disallowance of deductions, resulting in significant tax liabilities and penalties.
- Stay compliant: Maintain thorough records and ensure all claims are substantiated with proper documentation.
Trigger #2: Overstated deductions
Claiming excessive deductions without appropriate backing can draw the IRS’ attention. AI tools are designed to detect patterns and anomalies in deduction claims, increasing the likelihood of an audit if discrepancies are found.
- Why it matters: Overstated deductions can trigger audits that not only disallow the claimed deductions but also lead to additional fines and interest, increasing the overall tax burden.
- Stay compliant: Review all deductions to ensure they are legitimate and supported by clear, accurate evidence.
Trigger #3: Transfer pricing issues
Incorrect or aggressive transfer pricing strategies can result in significant discrepancies that may prompt an audit. AI is increasingly used to analyze transfer pricing data, making compliance with IRS guidelines more important than ever.
- Why it matters: Noncompliant transfer pricing can lead to large tax adjustments and potential double taxation, affecting your company’s global tax strategy.
- Stay compliant: Implement compliant transfer pricing policies and conduct regular internal reviews to ensure alignment with IRS guidelines.
Trigger #4: R&D tax credit claims
Claiming the research and development tax credit without sufficient documentation or qualifying activities can be a red flag for the IRS. The agency’s AI systems are particularly focused on scrutinizing R&D claims, making detailed documentation essential.
- Why it matters: Improperly documented R&D claims can result in denied credits, leading to higher tax payments and the potential for future audits on related activities.
- Stay compliant: Ensure all claimed activities meet IRS criteria and are properly documented.
Trigger #5: Reporting inconsistencies
Inconsistent reporting between different tax forms or between years can raise red flags. AI tools used by the IRS are highly effective at spotting these inconsistencies, which can lead to further investigation.
- Why it matters: Reporting inconsistencies can indicate potential fraud or errors, resulting in prolonged audits and potentially severe penalties.
- Stay compliant: Regularly review and cross-check filings to ensure consistency across all forms and years.
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Source: RSM US LLP.
Reprinted with permission from RSM US LLP.
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