IRS Audits in 2025: Key Issue for Real Estate Owners & Business Investors
If you own real estate or run a business, you might be wondering what IRS audits will look like in 2025. The good news? The IRS isn’t ramping up random audits as much as some had expected. The bad news? They’re getting better at spotting tax mistakes, and they’re focusing more on people with complex filings—like real estate investors and business owners.
So, what does that mean for you? Let’s break it down.
How IRS Audits Are Changing in 2025
Fewer Audits, But Smarter Ones
The IRS was supposed to get a big funding boost to increase audits, but in 2025, a large portion of that money was frozen. That means they probably won’t be auditing a ton of extra people. Instead, they’re getting more selective about who they audit—focusing on areas where mistakes (or fraud) are more likely.
If you have a simple W-2 job and take the standard deduction, you’re probably in the clear. But if you own a business, have rental properties, or report large deductions, your tax return could be flagged for a closer look.
More Technology, More Scrutiny
Even with budget cuts, the IRS is investing in artificial intelligence (AI) and data analysis tools to catch tax mistakes more efficiently. This means:
- They can spot discrepancies faster—like if your reported income doesn’t match what a bank or payment processor reports.
- They can compare your deductions to industry standards and flag anything that looks too high.
- They can track cryptocurrency transactions more easily than before.
So while fewer people might get audited, those who do could face a more thorough review.
What Real Estate Owners Should Watch For
If you own rental properties or invest in real estate, here are a few things that could put you on the IRS’s radar:
1. Rental Income & Deductions
The IRS wants to make sure you’re properly reporting rental income—especially if you use platforms like Airbnb or Vrbo. They also check deductions, like repairs, depreciation, and mortgage interest, to ensure they’re not being exaggerated.
What to do: Keep clear records of all rental income and expenses. Make sure you’re separating improvements (which must be depreciated) from repairs (which can be deducted immediately).
2. Passive vs. Active Income
Real estate investors can qualify for certain tax benefits if they’re considered “real estate professionals” by IRS standards. However, this requires proving that you spend most of your working hours on real estate activities.
If you claim real estate professional status but also have a full-time job in another industry, that’s a red flag. The IRS has been cracking down on this, so be ready to provide documentation of your hours if you claim this status.
What to do: If you’re claiming real estate professional status, keep a log of your time spent managing properties. Be realistic—if you’re working 40+ hours a week at another job, the IRS might not buy it.
3. 1031 Exchanges
A 1031 exchange lets you defer taxes when selling an investment property by reinvesting the proceeds into a similar property. The IRS often scrutinizes these transactions to ensure they meet the strict timing and qualification rules.
What to do: Work with a tax professional when doing a 1031 exchange to ensure you follow all IRS guidelines. Even a small mistake could disqualify the tax benefits.
What Business Owners Should Watch For
If you run a business, whether as a sole proprietor, LLC, or corporation, the IRS will be looking closely at the following areas:
1. Business Deductions
Business expenses are deductible, but the IRS is always watching for deductions that seem excessive or personal in nature. Common areas that raise flags include:
- Large meal and entertainment expenses
- Home office deductions that don’t meet IRS guidelines
- Expensive travel expenses that could be considered personal
What to do: Make sure your deductions are reasonable and well-documented. If you claim a home office deduction, it must be used exclusively for business.
2. Payroll Taxes & Worker Classification
The IRS is cracking down on businesses that misclassify employees as independent contractors to avoid payroll taxes. If your business relies heavily on contractors, the IRS may check whether they should be classified as employees.
What to do: Ensure your contractors truly qualify as independent under IRS rules. If they work set hours and rely on your company for most of their income, they might need to be classified as employees.
3. S-Corp & Partnership Income
If you own an S-corporation or partnership, the IRS may review how you’re handling distributions vs. salary. Taking low (or no) salary while paying yourself large distributions can be a red flag.
What to do: If you’re an S-corp owner, pay yourself a reasonable salary based on industry standards before taking large distributions.
What Happens If You Get Audited?
An IRS audit doesn’t necessarily mean you did something wrong, but it does mean they want more information. Here’s how the process works:
- You’ll get a letter – The IRS will notify you by mail if you’re being audited. (They won’t call or email.)
- They’ll request specific documents – Depending on the issue, they may ask for receipts, invoices, bank statements, or other records.
- The audit can be done by mail, at an IRS office, or in person – Most audits are done via mail, but more complex cases may require an in-person meeting.
- If they find mistakes, you may owe taxes, penalties, or interest – If the IRS determines you underpaid, they’ll send a bill. You have the right to appeal if you disagree.
How to Protect Yourself
Even if you’re confident in your tax filings, it’s always good to be prepared in case the IRS comes knocking. Here’s how:
Keep clear records – Save receipts, invoices, and bank statements for at least three years. Good documentation is your best defense in an audit.
Report income accurately – The IRS gets income reports from banks, employers, and payment platforms. If your numbers don’t match up, you’re more likely to get audited.
Don’t round numbers – If your tax return is full of round numbers (like $5,000 or $10,000), it looks suspicious. Report actual amounts, even if they’re odd.
Work with a tax professional – If your taxes are complex, an experienced accountant or tax attorney can help ensure compliance and defend you if an audit happens.
Final Thoughts
While the IRS isn’t massively increasing audits in 2025, they are getting smarter about how they choose who to audit. If you own real estate or run a business, now is the time to review your tax filings and make sure everything is in order.
At Milikowsky Tax Law, we specialize in IRS audit defense for real estate owners, business investors, and high-net-worth individuals. If you’re concerned about the increased audit risk in 2025, contact us to discuss how we can help protect your interests.
