Introduction
The IRS is intensifying efforts to combat tax fraud in 2025, focusing on high-income earners, cryptocurrency transactions, unreported income, and fraudulent deductions. With increased IRS funding, audit rates are rising, and enforcement is stricter than ever.
This article explains how the IRS is cracking down on tax fraud, referencing Internal Revenue Code (IRC) sections, highlighting IRS audit red flags, and providing examples, penalties, and compliance steps to help taxpayers avoid legal issues.
Key IRS Tax Fraud Enforcement Measures for 2025
The IRS is strengthening tax enforcement through:
- Expanded audit programs targeting high-income taxpayers
- Increased scrutiny of cryptocurrency transactions
- Stronger penalties for fraudulent tax returns
- New reporting requirements for digital assets and business income
Under IRC § 6663, tax fraud penalties can result in a 75% penalty on the underreported amount plus criminal charges in severe cases.
Increased IRS Audits and Who Is Being Targeted
The IRS is focusing on specific groups with higher audit risks in 2025:
| Targeted Taxpayer Group | Audit Focus Areas |
|---|---|
| High-income earners ($400,000+ income) | Unreported income, complex deductions, offshore accounts |
| Cryptocurrency investors | Unreported digital asset sales, foreign crypto holdings |
| Self-employed individuals & small businesses | Overstated deductions, 1099 income mismatches |
| Earned Income Tax Credit (EITC) claimants | Fraudulent refund claims, overstated dependents |
| Real estate investors | Misuse of depreciation, 1031 exchanges |
IRS Focus on Cryptocurrency Transactions
Under IRC § 6045, the IRS now requires cryptocurrency exchanges to report transactions.
- Taxpayers must report crypto gains on Form 8949 (Sales of Capital Assets).
- Unreported crypto income can result in penalties up to 75% of the tax due.
- The IRS is using blockchain tracking technology to identify unreported crypto transactions.
Example: Crypto Tax Fraud Case
Alex buys Bitcoin for $5,000 and later sells it for $30,000, making a $25,000 gain.
- If he fails to report this on Form 8949, the IRS may flag his return.
- If audited, he could face penalties and interest on the unpaid tax.
Common Tax Fraud Red Flags That Trigger an Audit
The IRS uses data analytics and AI to detect fraudulent tax returns. Red flags include:
- Claiming excessive business deductions on Schedule C
- Underreporting income on Form 1040
- Claiming fake dependents
- Large charitable deductions that don’t match income
- Foreign bank accounts not reported on FBAR (FinCEN Form 114)
Example: High-Risk Deduction Claim
Sarah, a freelance consultant, earns $150,000 but claims $80,000 in business deductions for travel and meals.
- The IRS may flag this as excessive and audit her Schedule C.
IRS Tax Fraud Penalties and Criminal Charges
Tax fraud penalties under IRC § 6663 can be severe:
- Civil penalties: 75% of the underreported tax
- Failure-to-file penalties (IRC § 6651): 5% per month, up to 25%
- Criminal tax evasion (IRC § 7201): Fines up to $100,000 and prison sentences up to 5 years
Example: Tax Evasion Case
Michael, a business owner, underreports his income by $500,000.
- The IRS investigates and finds intent to evade taxes.
- He faces $375,000 in penalties (75% of underreported tax) and possible jail time.
Steps to Avoid IRS Scrutiny and Ensure Compliance
- Report All Income – Ensure all income from 1099s, cryptocurrencies, and foreign accounts is correctly reported.
- Keep Accurate Records – Maintain receipts, bank statements, and business records.
- Avoid Inflating Deductions – Claim only legitimate expenses backed by documentation.
- File on Time – Use IRS Form 4868 for an extension if needed.
- Consult a Tax Professional – A CPA or EA can help ensure accurate tax reporting and reduce audit risks.
Conclusion
The IRS is aggressively targeting tax fraud in 2025, focusing on high-income taxpayers, cryptocurrency traders, and small businesses. Ensuring full tax compliance is the best way to avoid IRS penalties and audits.
To review your tax situation and minimize risks, schedule a meeting with Anshul Goyal, CPA EA FCA for expert tax guidance. Book an appointment here:
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant (CPA) in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in IRS compliance, tax litigation, and assisting American businesses and Indian expatriates in managing U.S. tax obligations.
Frequently Asked Questions (FAQs)
1. Who is most at risk for an IRS audit in 2025?
High-income taxpayers, cryptocurrency traders, and small businesses with large deductions or unreported income face the highest audit risks.
2. What happens if I underreport my income?
Under IRC § 6663, tax fraud penalties can be up to 75% of the unpaid tax, plus interest and potential criminal charges.
3. Do I have to report cryptocurrency transactions?
Yes. Under IRC § 6045, all cryptocurrency sales and trades must be reported on Form 8949 and Schedule D.
4. Can I go to jail for tax fraud?
Yes. Under IRC § 7201, intentional tax evasion can lead to fines up to $100,000 and up to 5 years in prison.
5. How can I reduce my IRS audit risk?
Ensure accurate tax reporting, maintain proper records, and consult a tax professional to comply with IRS rules.