Understanding IRS Enforcement Priorities

Overview
The IRS cannot examine every return, so it uses a risk‑based approach to focus limited staff and technology on returns and issues that are most likely to be noncompliant or to yield significant revenue. These enforcement priorities change over time as new laws are enacted, markets evolve (for example, digital assets), and IRS research identifies persistent problem areas.

How the IRS sets enforcement priorities

• Data and third‑party reporting: The IRS matches information returns — W‑2s, Forms 1099 (including 1099‑NEC and 1099‑B), and other third‑party reports — against what taxpayers report. Mismatches, unexplained items, or unusual patterns can trigger correspondence audits or automated notices.
• Analytics and predictive models: The agency uses statistical models and machine learning to flag returns with a higher probability of error. This helps prioritize complex, high‑impact cases over low‑value ones.
• Special projects and research: IRS research and compliance studies (often summarized in the IRS’s annual reports and enforcement highlights) identify sectors or transaction types with systemic underreporting.
• Law and policy changes: New tax provisions, credits, or reporting rules commonly prompt targeted outreach and later enforcement. For example, expansion of refundable credits or changes in digital asset guidance typically get special attention.
• Tips, whistleblowers and referrals: Information from whistleblowers, other government agencies, or IRS tip lines can launch examinations of specific taxpayers or schemes.

Core enforcement areas (what the IRS commonly prioritizes)

1. High‑income and high‑wealth taxpayers
   Because the potential tax gap (unpaid taxes) is larger per case, the IRS maintains teams focused on high‑net‑worth individuals and complex returns. These examinations may probe offshore accounts, sophisticated deductions, passthrough income allocation, trusts, and estate‑tax planning.

2. Large corporations and international tax issues
   Transfer pricing, profit shifting, and cross‑border transactions remain priorities. The IRS coordinates with foreign tax authorities and uses specialists to evaluate multinational structures.

3. Pass‑through entities and complex business arrangements
   S corporations, partnerships, and other passthroughs can create opportunities to misallocate income, shift deductions, or obscure owner compensation. The partnership audit rules added in recent years (Centralized Partnership Audit Regime) changed how many partnership adjustments are handled, creating compliance focus on partnership reporting (see our glossary entry on Centralized Partnership Audit Regime Opt‑Out: https://finhelp.io/glossary/centralized-partnership-audit-regime-opt-out/).

4. Employment taxes and worker classification
   Proper withholding, reporting of payroll taxes, and correct classification of workers as employees versus independent contractors are frequent enforcement targets. Misclassification can generate back taxes, penalties, and interest for employers. See our guides on A Guide to Self‑Employment Taxes and Household Employment Taxes (Nanny Tax).

5. Refundable tax credits and benefit programs
   The IRS pays special attention to refundable credits that can drive error or fraud, such as the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC), and other refundable benefits. These areas often receive compliance reviews and concentrated examination activity.

6. Cash‑intensive businesses and understatement of income
   Restaurants, salons, convenience stores, car washes and other cash‑heavy operations historically show higher underreporting risk. The IRS looks for patterns like large cash deposits not supported by reported sales.

7. Digital assets and cryptocurrency
   The IRS has increased scrutiny of virtual currencies and other digital assets. Taxpayers must report sales, exchanges, and certain income from crypto transactions (Form 8949 and Schedule D for capital gains, and sometimes ordinary income). For more on this topic, see our piece on Tax Implications of Cryptocurrency.

8. Abusive tax shelters and promoters
   Schemes marketed to evade taxes or disguise income attract enforcement and promoter investigations. The IRS deploys civil and criminal tools against those who design and sell abusive tax arrangements.

9. Identity theft and refund fraud
   The IRS devotes resources to detecting stolen‑identity returns and false refund claims using data analytics and identity verification steps to protect taxpayers and the Treasury.

How enforcement activity has shifted recently (through 2025)
Legislative changes and appropriations in recent years gave the IRS more resources for enforcement, technology, and taxpayer service. The agency has emphasized modernization of data systems and analytics to improve third‑party data matching and identify sophisticated noncompliance. As a result, taxpayers in higher‑risk categories — notably high‑income filers, complex businesses, and crypto traders — are more likely to see increased examination and collection activity than the typical wage‑earner with simple W‑2 income.

Common triggers that raise the likelihood of an IRS inquiry

• Mismatch between third‑party reports and filed returns
• Large or unusual deductions relative to income in the same industry
• Repeated losses for hobby activities or rental properties lacking commercial records
• Improperly claimed refundable credits (EITC, ACTC)
• Nonreporting of cryptocurrency transactions or unexplained capital gains
• Large cash deposits inconsistent with reported sales

What to do to reduce your risk and be audit‑ready

• Keep organized records: Maintain receipts, invoices, bank statements, and digital records for at least three years (seven years in cases of substantial underreporting or certain losses). The IRS typically has a three‑year statute of limitations, which extends to six years for substantial omissions.
• Report all income: Ensure you include W‑2s, 1099s, and any Form 8949 capital transactions. Many third parties also file copies with the IRS.
• Use reasonable valuations and documentation for deductions and credits: For travel, home office, charitable donations, and business expenses, keep contemporaneous records and business purpose notes.
• Correct errors proactively: If you discover a mistake, consider filing an amended return (Form 1040‑X) or consult a tax professional. Voluntary disclosures can reduce penalties.
• Get professional help for complex situations: For large estates, international transactions, or complicated business structures, work with a CPA, enrolled agent, or tax attorney experienced in the relevant area.
• If contacted, respond promptly and calmly: Read IRS notices carefully, respond within requested timeframes, and provide documentation. If a notice is unclear or seems suspicious, verify by contacting the IRS via official numbers on IRS.gov rather than calling numbers on the notice.

If you receive an audit notice

• Confirm it’s real: Most IRS initial contacts come by mail. The IRS will not call to demand immediate payment without first mailing notices. If you receive a threatening or suspicious call, see the IRS guidance on scams at https://www.irs.gov/.
• Gather records: Collect the documents the IRS requests. Use our guide How to prepare for an IRS audit for steps and timelines.
• Consider representation: You can represent yourself, but many taxpayers hire a CPA, enrolled agent, or attorney to communicate with the IRS and negotiate adjustments.

Where to find help and more information

• IRS website (authority for forms, instructions, and notices): https://www.irs.gov/
• Taxpayer Advocate Service (independent resource for unresolved problems): https://www.taxpayeradvocate.irs.gov/
• FinHelp.io glossary and guides: examples include Tax Audits of Small Businesses: What to Expect and A Guide to Self‑Employment Taxes.

Bottom line
IRS enforcement priorities are driven by data, law changes, and resource decisions. While no taxpayer is completely audit‑free, keeping thorough records, reporting income accurately, and consulting qualified tax professionals for complex situations reduces risk and makes any examination easier to resolve. Staying informed about areas the IRS is actively monitoring — such as employment taxes, digital assets, and refundable credits — helps taxpayers focus compliance efforts where they matter most.