The IRS is sharpening its focus on specific areas of tax compliance for 2025, particularly addressing significant non-compliance issues. Recent announcements reveal the agency’s commitment to using enhanced resources and data analytics to ensure fair enforcement. Here’s a look at some key areas where the IRS plans to direct its audit efforts:
1. Labor Brokers in the Construction Industry
Labor brokers have come under increased scrutiny for facilitating tax evasion. In some cases, brokers create shell companies to underreport wages, avoid payroll taxes, and pay workers in cash. These schemes lead to significant tax revenue losses and harm to workers who miss out on benefits like Social Security and unemployment insurance.
The IRS is ramping up audits of labor brokers and contractors who use them. Contractors may also face liability for unpaid payroll taxes if they’re found complicit or fail to exercise due diligence in verifying the broker’s compliance.
2. Reasonable Compensation for S Corporation Owners
Another key focus area is the issue of reasonable compensation for S-corporation owners. S-corporation owners often receive distributions, which aren’t subject to payroll taxes, in addition to a salary. However, some owners improperly minimize their salaries to reduce Social Security and Medicare taxes while taking larger distributions.
The IRS requires that S Corp owners pay themselves a salary that reflects the reasonable value of their services. If the salary is deemed unreasonably low, the IRS may reclassify distributions as wages and assess payroll taxes, penalties, and interest. This remains a hot audit topic, addressing a widespread tax avoidance strategy among small business owners.
3. High-Income Non-Filers
The IRS also focuses on high-income non-filers—individuals who earn substantial income but fail to file tax returns. These cases represent a significant source of lost tax revenue. With new data analytics tools and improved reporting systems, the IRS is better equipped to identify non-filers trying to evade their tax obligations.
The focus will be on those with income over $100,000 who have not filed required returns, especially in industries or professions where non-filing is common. The IRS prioritizes enforcement actions in these cases to ensure compliance and recover unpaid taxes.
4. High-Income Individuals and Large Corporations
The IRS is ramping up audits of individuals with income over $10 million and corporations with assets exceeding $250 million. The agency aims to triple audit rates for large corporations and increase scrutiny on wealthy taxpayers, particularly those suspected of using complex tax avoidance strategies.
5. Cryptocurrency Transactions
With the rise of digital assets, the IRS is intensifying efforts to ensure taxpayers report gains and losses from cryptocurrency transactions. Enhanced reporting requirements and expanded audits aim to close the gap in compliance in this rapidly growing sector.
6. Foreign Bank Accounts and Assets
Taxpayers with foreign financial interests must file FBAR (Foreign Bank Account Reporting) forms if their account balances exceed $10,000. The IRS focuses on high-value non-filer cases to ensure compliance with international tax reporting requirements.
7. Abusive Tax Schemes
The IRS continues its crackdown on abusive tax shelters, including micro-captive insurance arrangements and syndicated conservation easements, often marketed to high-income taxpayers. These schemes allow participants to claim inflated deductions or avoid taxes, leading to substantial revenue losses.
Conclusion
The IRS is making a significant shift in its audit priorities, moving away from minor issues like travel and entertainment deductions and focusing on areas that involve much more substantial sums of money. High-income non-filers, labor brokers, S Corporation owners, and taxpayers involved in cryptocurrency or foreign assets are now at the forefront of the agency’s enforcement efforts. This strategic pivot aims to close the tax gap by targeting the most significant sources of non-compliance.
Taxpayers in these high-risk categories should take proactive steps to ensure full compliance.
