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IRS Audits Surge in 2026: AI Selection, Partnerships, and the $400,000 Line

6 min read · By Jonathan C. Do, Esq. · June 2026

After years of historically low audit rates, the IRS has spent its Inflation Reduction Act funding building something new: a data-driven enforcement machine aimed squarely at higher earners, large corporations, and partnerships. The agency's own strategic plan lays out steep audit-rate increases targeted for tax year 2026 — and if you own a partnership, an S-corp, or a complex small business, it's worth understanding where you actually stand.

What the IRS has actually said

In the spring 2024 update to its Strategic Operating Plan, the IRS published concrete audit-rate targets for tax year 2026, all measured against 2019 levels:

• Wealthy individuals with total positive income above $10 million: audit rates rising to roughly 16.5%, up from about 11% in 2019.
• Large corporations with more than $250 million in assets: audit rates roughly tripling to about 22.6%, up from 8.8% in 2019.
• Large partnerships with more than $10 million in assets: audit rates increasing roughly tenfold to about 1%, up from 0.1% in 2019.

These targets are funded by the roughly $80 billion the IRS received under the Inflation Reduction Act of 2022, a portion of which has since been clawed back in later budget deals — but the enforcement strategy and the technology behind it remain in place.

The $400,000 pledge — and its limits

The Treasury Department has repeatedly stated that audit rates will not increase for individuals and small businesses earning under $400,000 a year. That pledge is real, but it's narrower than it sounds. It's a promise about audit rates, not about the agency's improving ability to spot mismatches through automated data matching. A return that doesn't line up with the W-2s, 1099s, and K-1s the IRS already has on file can still draw a notice or examination regardless of income.

How AI is changing who gets picked

The most significant shift isn't the headline percentages — it's how returns are selected. The IRS has publicly said it is using advanced data analytics and machine-learning models to identify large, complex partnerships and pass-through structures that were historically too resource-intensive to audit. Returns with large losses, complicated allocations among partners, or webs of related entities are now far more likely to surface.

For smaller businesses, the same data-matching engine flags the familiar red flags more efficiently than ever: income that doesn't match third-party reporting, deductions that are high relative to industry norms, heavy cash activity, and repeated year-over-year losses on a Schedule C.

What this means for San Jose businesses

Silicon Valley is full of exactly the structures the IRS is now prioritizing — multi-member LLCs, tiered partnerships, S-corps with significant pass-through income, and founders with complex equity and investment returns. If your business falls into one of these categories, the practical takeaway isn't panic; it's preparation. The audits that go badly are almost always the ones where the documentation didn't exist before the letter arrived.

Three things worth doing now

1. Reconcile before you file. Make sure every return ties out to the third-party forms the IRS already has — W-2s, 1099s, K-1s, and 1098s. Most automated notices come from simple mismatches.

2. Keep contemporaneous records for partnership allocations and large deductions. If a number is unusual, assume it will be questioned, and keep the support that explains it.

3. Don't face an examination letter alone. Partnership and pass-through audits move under specialized procedures, and how you respond in the first 30 days shapes the entire case.

About the author: Jonathan C. Do is a tax attorney with 25+ years representing businesses and individuals in IRS audits, appeals, and U.S. Tax Court matters. He practices at Tax Resolution Center LLC in San Jose, CA.