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6 Reasons the IRS Is Flagging More Trusts in 2025

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Trusts have long been a reliable tool for managing assets, reducing taxes, and protecting wealth for future generations. However, the IRS is increasing its focus on trust reporting and compliance, meaning more trust arrangements are being reviewed than in previous years. For trustees, beneficiaries, and grantors, this shift can have serious financial implications if records are incomplete or the structure is questionable. Understanding why the IRS is flagging more trusts in 2025 can help you prepare and avoid costly audits or penalties. Here are six reasons behind the increase in scrutiny — and what you can do to stay compliant.

1. Increased Reporting Requirements for Beneficial Ownership

One major reason the IRS is flagging more trusts in 2025 is the expansion of reporting requirements for beneficial ownership. New rules require greater transparency about who ultimately controls or benefits from a trust. This includes disclosing names, addresses, and taxpayer identification numbers of all relevant parties. The IRS is using this data to spot patterns that might indicate tax evasion or hidden assets. If your trust documents aren’t up to date with these disclosures, it could be flagged for further review.

2. Heightened Focus on Foreign Trusts

Foreign trusts have always attracted IRS attention, but 2025 brings even more oversight due to global efforts to crack down on tax havens. The IRS is flagging more trusts in 2025 that involve offshore accounts or property ownership outside the United States. Even if the trust is legitimate, missing or inaccurate reporting on Form 3520 or 3520-A can trigger audits. The penalties for noncompliance with foreign trust reporting are steep, sometimes reaching tens of thousands of dollars. Staying ahead of these requirements is crucial for trustees with international holdings.

3. Suspected Use for Income Shifting

Income shifting — transferring income to beneficiaries in lower tax brackets — is a legitimate strategy when done properly. However, the IRS is flagging more trusts in 2025 when it suspects the arrangement exists primarily to avoid taxes. Sudden spikes in distributions, irregular beneficiary patterns, or inconsistent filings can all raise red flags. The IRS is using advanced analytics to detect these irregularities more quickly than in the past. Ensuring the trust has a clear, documented purpose beyond tax savings can help avoid unnecessary scrutiny.

4. Complex Structures Without Clear Documentation

The more complicated the trust, the more likely it is to catch the IRS’s eye, especially if the supporting paperwork is lacking. In 2025, the IRS is flagging more trusts that contain multiple layers of entities, cross-ownership, or hard-to-value assets without clear accounting trails. These arrangements can make it difficult to determine taxable income and the rightful allocation of deductions. Without accurate, organized records, even legitimate trusts can face prolonged audits. Trustees should prioritize transparency and maintain clear documentation for every transaction.

5. Discrepancies Between Tax Returns and Trust Filings

Another reason the IRS is flagging more trusts in 2025 is the growing use of cross-checking between personal, business, and trust tax returns. If reported income or deductions don’t match across these filings, the IRS sees it as a sign something may be amiss. For example, if a trust claims a deduction for property expenses but no related income appears elsewhere, it may trigger a review. Automated systems are making these discrepancies easier to spot. Regular reconciliation between all related filings can help avoid mismatches.

6. Large Distributions Without Proper Withholding

When a trust makes large distributions, certain amounts may need to be withheld for taxes. The IRS is flagging more trusts in 2025 when these withholdings are missing, late, or improperly calculated. This is especially true for distributions to foreign beneficiaries, which have strict withholding rules. Failing to comply not only triggers audits but can also lead to hefty penalties for the trustee. Understanding the withholding obligations for your specific trust type is essential to staying in compliance.

Staying Ahead of IRS Scrutiny

The fact that the IRS is flagging more trusts in 2025 doesn’t mean trusts are no longer valuable estate planning tools. It does mean, however, that careful attention to compliance, transparency, and accurate reporting is more important than ever. Trustees should work closely with accountants, attorneys, and financial advisors to ensure every detail is handled properly. By being proactive rather than reactive, you can preserve the benefits of your trust while avoiding unnecessary conflict with the IRS.

Do you think your trust would pass today’s stricter IRS standards? Share your thoughts and experiences in the comments to help others prepare.

10 Employer “Perks” That Void Retirement Tax Breaks

Catherine Reed

Catherine is a tech-savvy writer who has focused on the personal finance space for more than eight years. She has a Bachelor’s in Information Technology and enjoys showcasing how tech can simplify everyday personal finance tasks like budgeting, spending tracking, and planning for the future. Additionally, she’s explored the ins and outs of the world of side hustles and loves to share what she’s learned along the way. When she’s not working, you can find her relaxing at home in the Pacific Northwest with her two cats or enjoying a cup of coffee at her neighborhood cafe.

tax pitfalls

Filing your taxes each year isn’t usually easy. For one, tax laws are incredibly complex. For another, there is a slew of credits and deductions out there, making it hard for most people to ensure that they’re tapping everything they’re eligible to use. Thankfully, by learning about tax pitfalls, it’s possible to handle your taxes correctly. Here are eight tax pitfalls that all filers need to pay attention to this year.

1. Not Researching Tax Breaks

As mentioned above, there are numerous credits and deductions available to tax filers. The thing is, if you don’t find the ones you can use on your own (or by using an appropriate tax service or professional), the IRS isn’t going to tell you that you missed one.

Generally, the IRS worries about you underpaying, not overpaying. If you miss a credit or deduction, that’ll essentially be on you.

If you’re worried that you’re overlooking an opportunity, then turn to a tax professional or use reputable tax software. With the former, they’ll have the expertise to ensure you check every potential option. With the latter, the software knows about every deduction and credit that’s out there and can help determine if you’re eligible with a few clicks.

2. Mixing Up the Deadlines

While it would be easier if all of the tax-related deadlines were the same, that isn’t how they’re set up. Certain things wrap up on December 31 of the tax year, while others extend into the new year. For example, mortgage interest and 401(k) contributions are calculated from January 1 through December 31 during the tax year.

However, you can make a qualifying contribution into an IRA until the tax filing deadline the year after. For instance, if you wanted to boost your tax deduction when you file your 2021 taxes in 2022, you could contribute to a qualifying IRA up until April 15, 2022, and apply that amount to your 2021 taxes. The same option is available for health savings accounts.

By knowing the various deadlines, you have the ability to maximize certain deductions within a given tax year. As a result, you may be able to reduce what you owe significantly.

3. Overlooking Non-Traditional Income

When you file your taxes, you need to include all of your income from every source. While this is simple with traditional jobs that provide W-2s, those aren’t the only kinds of earnings that you’ll need to report.

For instance, anything reported on a 1099 typically needs to be reported. This includes self-employment income from specific sources, as well as investment earnings, gambling winnings, sweepstakes prizes, lottery winnings, savings account interest, and more.

Additionally, you have to report income that doesn’t show on any forms. Usually, a 1099 is only required if the dollar amount in question crosses a specific line, such as $600. However, if you earned $200 doing online surveys, you still have to report that money, even if you don’t get a 1099. Otherwise, you may underreport and could face a penalty.

4. Making Math Mistakes

Even a small math error can have big consequences if it causes you to underpay. Plus, errors might increase your odds of getting audited, which isn’t any fun.

Usually, math issues are most likely for those doing their taxes by hand. With software systems – including those traditionally used by tax professionals – the calculations are built into the program, reducing the likelihood of a mistake. As a result, using a solution could be your best bet.

5. Incorrect Names or Social Security Numbers

While you might think that a small typo in a filer’s or dependent’s name or Social Security number isn’t a big deal, the IRS doesn’t agree. Missing or incorrect Social Security numbers will get noticed and trigger ramifications, the nature of which may vary depending on the rest of your situation.

The same goes for misspelled names. If the name doesn’t match what’s on file with Social Security, you could face filing difficulties.

6. Choosing the Wrong Filing Status (or Incorrectly Claiming Dependents)

When you file your taxes, you have to select a filing status. If you pick the wrong one, you could end up paying more than you should or less than you’re required. With the former, that means sending money to the IRS that you didn’t owe, which isn’t ideal. With the latter, you’ll face penalties when your mistake is caught.

Incorrectly claiming dependents comes with the same risks. You could end up over or underpaying, neither of which is good.

If you need more information about filing status and dependent options, the IRS has an online tool that can help. Plus, most tax software solutions and professionals can help you determine the right classification for your situation.

7. Not Filing for an Extension If You’re Struggling Last Minute

If you’re trying to wrap up your taxes and filing day is just a couple of days away, be realistic about whether you can pull it off. If your situation is too complex to finish on your own in that time, file for an extension immediately.

When you file for an extension, you’re letting the IRS know that you are having trouble getting everything handled before the deadline, keeping the agency in the loop. Usually, the IRS is reasonably forgiving if you file an extension and will typically grant you the needed time in this situation. Just remember that you need to pay what you owe by the filing deadline. Otherwise, you may face financial penalties.

8. Paying Too Much to File

Many people don’t realize that those with simple tax situations and who have household incomes below a specific threshold can usually file their taxes online for free. For example, if your adjusted gross income (AGI) is no more than $73,000, you can use the IRS Free File program, which includes online forms, automatic calculations, and e-file capabilities.

However, there are other free services available. Many of the major tax software providers have a free version for simple tax situations, such as those who only have W-2 income to report, are claiming the standard deduction, and are only using basic tax credits.

Before you pay for any service, see if a free filing option is available to you. That way, you can get the job done without spending any money unnecessarily.

Can you think of any other tax pitfalls people should watch out for when they file? Have you had to deal with any of the pitfalls above and want to tell others about your experience? Share your thoughts in the comments below.

Tamila McDonald

Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.