2025 IRS Audit Trends

The purpose of this article is to break down trends on IRS audits, and give a bit of a (shallow but deep? Deeper than the kiddie pool but not the diving board) dive into what we are seeing from the IRS Audits for 2025.

So, what trends have I seen over the past year? And what insights can I break down for you?

Every audit has asked for a time log. Every single one.

Let’s step back for two seconds and talk about the different kinds of audits.

Each audit will have ‘IDRs’ (Information Document Requests). These are looking for receipts and other documentation that will back up the expenses

• Bank statements
• Cancelled checks

I had a client who had the receipt, and then was still not allowed to take the deduction, until she could show her bank statement (with the highlight). Excel documents work, but are not as helpful (need to have backups). This is why we highly emphasize having a system like QuickBooks and recommend having receipts.

How do you know if you’re being audited?

Generally, you’ll receive some form of ‘first contact’ letter (a 566 Kickoff) as initial contact. Typically, it has a 30-day response time, and you can always ask for an extension.

Then it flows into Form 4564 Information Documentation, which can be followed by proposed adjustments by the IRS (Form 4549). If you can’t agree with the IRS, they conclude their audit with a ‘30 day letter,’ which is the point where you can either get a manager meeting (to close beforehand) or go to IRS Appeals (who work to mitigate cases between the IRS and the taxpayer).

There are numerous forms to consider in this case. (Which is why it is key to work with a tax professional who understands all of this)

Now, let’s take two steps back and talk about the types of audits:

Types of Audits

• Correspondence Audit
• Office Audit
• Field Audit
  • About 75% of our examinations are IRS Field Audits

Correspondence Audits

This is purely based on notice. There is no ‘specific’ agent on this one. It creates a bit more difficulty to resolve (and this is mostly due to the staff changes at the IRS currently)
A lot of information will need to be mailed back and forth.

Office Audits

These are held at the IRS office. You can try to avoid doing it in person, but the agents typically push back on this.

My personal recommendation? Attend in person, bringing all relevant paperwork, and provide your representation by phone.
(Do not, and I repeat, do not try to DIY it, or use the same LLM to do it for you.) The agents want to wrap these up quickly and get them done as soon as possible.

Having ‘enough’ can work here to get this closed.

Field Audits

This is an actual revenue agent, working with a direct manager.

Most of these audits come from the Small Business/Self-employed division of the IRS (most audits come from this division). We need to have as many receipts as possible in this process because they are looking. This is the point in time when we need more documentation.

So what have they consistently asked for?

Documentation

• Material Participation Time Logs
• Proof of Interest Paid
• Proof of Furniture
• Receipts for Repairs and Maintenance
• Closing Statements of the Property
• Cost Segregation Studies (we’ll get to this one next)
• Financial Statements (Profit & Loss & Balance Sheet)

Time Log: Has been asked for every single audit

I had one audit where they almost forgot it (I think the manager reminded this agent to get it).

Proof of Expenses

We need receipts, invoices, the whole 9 yards.

The IRS is looking at the repairs, too. They want to make sure we shouldn’t have capitalized something we shouldn’t have, and would reduce our overall expenses.

Can you have reasonable estimates? Yes, you can, but that means you are likely being limited.

Financial Statements

This helps show the intention to run as a trade or business. The IRS is looking for and listening to all the words that are being said.

Cost Segregation Studies

Here is the #1 item we are having to go to bat for right now. In February of 2025, the IRS updated its Audit Technique Guide.

They updated it to show the Amerisouth court case as support to disallow residential cost segs showing 1245 property. In Amerisouth, they are making the case that items like flooring, cabinets, and similar items are NOT actually personal property (which means shorter depreciation and are eligible for bonus depreciation).

Every single one of our audits is being held up by this at the moment. Why is Amerisouth’s case law terrible?

Because the petitioner, Amerisouth, failed to represent themselves or respond to their counsel. So the attorneys rescinded themselves, and the IRS got its cake and ate it, too.

We are currently working with and pushing the IRS to reconsider these expectations, providing documentation that explains why cabinets and related items are not inherently ‘permanent’ and crucial to the building structure.

Is every situation case by case? Yes absolutely. But also, it is essential to note that this might need to be taken to tax court at some point in the future and be overturned.

What else are we seeing?

IRS Updates

We have had multiple audits pushed to their 4th or 5th auditor. It’s really unfortunate and frustrating in this process.

However, it’s entirely out of our control, and even the agents’ control. The IRS is having its staffing significantly cut back. Managers, the more experienced employees, are taking separation packages.

This means that those who knew shortcuts and ways to work around issues are slowly being removed. This is not a good result for taxpayers ultimately, and will AI help streamline this?

Maybe. But other systems at the IRS will need to be updated first.

Overall?

• Audits are moving more slowly.
• Amerisouth is the flag plant of the IRS (for now).
• Documentation is everything.
• Clients who worked with us for tax strategy and preparation have a much faster close time and have fewer adjustments.

Why?

Because we advised them on legitimate, defensible strategies and did not ‘cover up’ red flags we were concerned with. We required legitimate documentation to substantiate, and taught them how to keep accurate records (or we did it ourselves).

Suggestions?

If you go after a tax strategy, make sure:
1. It’s defensible and allowed under the tax code.
2. You have support and documentation for the strategy.
3. That your returns are prepared accurately and properly.

I always recommend enlisting qualified representation for audits (CPA, EA, tax attorney) as they are necessary for you to avoid missteps with the IRS.

While your representation cannot do everything (and might need you to be involved somewhat on the audits), they will be able to advise you on what to say, what not to say, and where the battles should be fought and directed.

Interested? Come work with us today!