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.
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