The Internal Revenue Service (“IRS”) is undergoing a period of rapid and, at times, unpredictable transformation. Since January 2025, the agency has terminated thousands of employees, navigated its third commissioner transition in as many months [¹], and scaled back key initiatives launched under the Inflation Reduction Act. Yet amid these cutbacks, the IRS has doubled down on modernizing audit targeting—particularly through the use of artificial intelligence (“AI”).
For business valuation professionals, tax advisors, and estate planning attorneys, these changes present both challenges and obligations. Although the total volume of IRS audits may decline in the short term, scrutiny is increasingly concentrated—particularly in cases involving business interests, pass-through entities, and high-value transfers.
These developments are unfolding against a broader backdrop of shifting agency priorities, increased political intervention, and heightened concern over politically motivated access to sensitive taxpayer information—particularly through the Department of Government Efficiency (“DOGE”), a new federal initiative launched by the Trump administration and closely associated with Elon Musk. The resulting environment is less about expanding access and more about who controls it, and for what purpose.
Widespread Layoffs and Leadership Vacancies
In February 2025, the IRS began layoffs projected to affect up to 20,000 employees. Approximately 7,000 terminations have already taken place, primarily among probationary hires in customer service and compliance functions. Many of these positions were created through Inflation Reduction Act funding to enhance audit capacity and taxpayer services [²].
At the same time, the agency has cycled through multiple acting commissioners. Melanie Krause, the third to serve in 2025, resigned in early April after opposing a controversial agreement that would allow the Department of Homeland Security access to taxpayer data of undocumented immigrants.
Former IRS whistleblower Gary Shapley briefly assumed the role but was quickly replaced by Deputy Treasury Secretary Michael Faulkender, who now serves as Acting Commissioner [³]. Reports from internal sources indicated that Shapley’s appointment raised red flags among Treasury and IRS officials. Concerns stemmed from his perceived lack of technical and procedural expertise to credibly oversee the agency’s new machine-learning audit systems. These systems, particularly those tied to the Large Partnership Compliance (“LPC”) initiative, rely on sophisticated, risk-based audit modeling. There was deep unease that under Mr. Shapley’s leadership, enforcement discretion could be subject to political influence or selectively applied—undermining the perceived neutrality and integrity of AI-driven audits.
President Trump has since nominated former Congressman Billy Long—known for past statements advocating for the dissolution of the IRS—to serve as Commissioner. His confirmation is currently pending Senate review [⁴].
This leadership turnover comes at a time when more than 70 million tax returns are being processed. Without stable executive direction, core functions—ranging from audit oversight to enforcement discretion—are increasingly vulnerable to external pressures. While DOGE and similar oversight initiatives have faced legal challenges and access restrictions, their emergence underscores how volatile and politicized IRS governance has become.
Political Pressure and Agency Independence
The IRS has increasingly become a focal point of political controversy. One high-profile example: President Trump’s public call for the agency to revoke Harvard University’s tax-exempt status following disputes over immigration and diversity policies. Though largely symbolic, such directives have stoked concern that enforcement decisions could be swayed by political motivations rather than consistent application of the tax code [⁵].
For valuation professionals, this signals a growing uncertainty. If audit scrutiny is perceived to be driven by optics or ideological considerations, then the predictability and fairness of enforcement—cornerstones of tax compliance—may come into question.
DOGE Access, Oversight Concerns, and Internal Tensions
The Department of Government Efficiency (“DOGE”) was introduced by the Trump administration in early 2025 as part of a broader effort to streamline and centralize federal oversight functions. Though DOGE lacks formal regulatory or legislative authority, it has operated under a loosely defined mandate to “enhance transparency and eliminate inefficiency.” Elon Musk, while not holding an official government position, has been publicly linked to DOGE as its key architect and de facto spokesperson.
Multiple legal challenges have emerged. Federal judges have restricted DOGE’s access to Social Security Administration systems, and investigations from the ACLU, labor unions, and state attorneys general have questioned the initiative’s legal standing and the scope of its activities [⁶]. Critics argue that DOGE’s reach bypasses traditional safeguards, raising concerns about privacy, oversight, and the potential politicization of enforcement.
In the IRS context, reports suggest DOGE sought direct access to tax data under the premise of improving operational efficiency. Treasury officials pushed back, citing clear statutory protections on taxpayer confidentiality [⁷]. While no such access has been formally granted, the mere attempt has fueled ongoing debate about the role of politically connected outsiders in shaping audit priorities.
Additionally, recent reporting has pointed to growing tension between Musk and Trump regarding DOGE’s direction. Disagreements over scope, speed of implementation, and public messaging reportedly contributed to a cooling of Musk’s influence within the administration—though he remains a vocal advocate of government reform from the outside [⁸].
For compliance professionals, enforcement priorities now appear increasingly influenced by political optics and executive preference. This unpredictability makes strategic planning more difficult and raises the stakes for audit exposure.
AI-Driven Audit Selection and a New Enforcement Group
Despite reduced staffing, the IRS has ramped up its use of advanced analytics to guide audit selection. In late 2023, it launched the Large Partnership Compliance (“LPC”) program, supported by AI and machine learning tools, to target high-asset pass-through entities such as hedge funds, private equity firms, and large family partnerships [⁹].
A specialized unit is using AI to detect patterns of noncompliance that traditional audit methods may overlook. The IRS has already reviewed 75 of the nation’s largest partnerships and plans to significantly expand this initiative throughout 2025 and 2026.
For those providing valuation services, this means the margin for error has narrowed. Documentation must now serve not just as support—but as defense under algorithmic scrutiny.
Executive Order on Partnership Basis Reporting
On April 21, 2025, President Trump signed Executive Order 14219, repealing prior Obama- and Biden-era regulations that required disclosures for basis-shifting transactions between related parties within partnerships. These disclosures were originally designed to flag potentially abusive tax planning strategies that inflate basis without true economic substance [¹⁰].
The rollback has raised concern that certain reporting gaps could be exploited just as the IRS attempts to modernize its audit selection process. It presents a mixed signal—tightening some controls while loosening others.
Audit Outlook: A Two-Tiered Landscape
IRS enforcement is now unfolding along two distinct tracks:
- Lower-income taxpayers, especially those claiming refundable credits like the Earned Income Tax Credit (“EITC”), continue to face audit pressure through automated systems requiring limited staffing.
- High-income individuals and complex entities, such as family partnerships and private foundations, are becoming the focal point of targeted, high-stakes audits informed by AI-driven risk analysis.
The result is fewer audits overall, but a higher probability of review for those with wealth or complexity. This makes defensibility—not volume—the new audit metric.
Valuation Implications for Estate, Gift, and Entity Transfers
With IRS enforcement now focused on complexity, valuation professionals must ensure their work is airtight. High-dollar estate and gift transfers, particularly those involving layered pass-through entities, carried interests, or related-party discounts, are prime candidates for scrutiny.
Key risk areas include:
- Use of aggressive or unsupported discounts for lack of control or marketability
- Application of outdated or non-comparable market data
- Methodology cherry-picking or overreliance on thin datasets
- Inadequately substantiated valuations for charitable contributions involving business interests
The IRS is now better equipped to detect inconsistencies across filings. What once went unnoticed may now raise red flags under AI review.
Professional Recommendations
To navigate the evolving enforcement climate, advisors and business owners should consider the following:
- Don’t relax standards. The overall audit rate may be down, but the probability of a high-value return being reviewed is up.
- Use credentialed professionals. Ensure the appraiser meets the IRS definition of a qualified appraiser and complies with USPAP reporting requirements when applicable. Reports should be rooted in widely accepted standards (AICPA, USPAP), backed by current market data, and clearly explain applied assumptions.
- Document thoroughly. IRS scrutiny is now fueled by cross-referencing digital records. Reports must withstand detailed review across multiple filings.
- Anticipate long-term exposure. The three-year audit window can extend to six or more years for substantial misstatements. Political changes could reopen dormant enforcement campaigns.
- Avoid assumptions of low scrutiny. Political attention, public controversies, or changes in leadership may lead to unpredictable audit triggers—even for taxpayers who believe they are low-risk.
- Coordinate across advisors. With AI flagging inconsistencies across gift, estate, and charitable filings, estate attorneys, tax professionals, and valuation experts should work together to ensure alignment.
Final Thoughts
The IRS in 2025 is not simply operating with fewer people—it’s enforcing differently. Armed with smarter systems and shaped by shifting political dynamics, the agency is deploying its resources more strategically—and more selectively. For valuation professionals and advisors, credibility is no longer optional; it is a necessary safeguard in an era of targeted enforcement.
At Vision Point Capital, we specialize in preparing IRS-defensible valuations for estate, gift, charitable contribution, and transaction planning purposes. If you are managing a complex ownership structure or preparing for a significant transfer, we can help you stay ahead of the compliance curve.
Contact us to learn how our valuation expertise can support your compliance strategies with clarity, credibility, and confidence.
References
[¹] Politico, “IRS losing third chief this year amid agency turbulence,” April 18, 2025.[²] Time Magazine, “How Mass Layoffs at the IRS Will Affect Tax Season,” February 28, 2025.
[³] Reuters, “IRS starts laying off 20,000 workers as civil rights office shut,” April 4, 2025.
[⁴] Politico, “Billy Long nominated as IRS commissioner amid political pushback,” April 19, 2025.
[⁵] The Guardian, “Trump urges IRS to revoke Harvard’s tax-exempt status,” April 17, 2025.
[⁶] AP News, “Federal judge curbs DOGE’s access to Social Security data,” April 18, 2025.
[⁷] Politico, “IRS data access sought by DOGE raises privacy concerns,” March 25, 2025.
[⁸] Axios, “Trump-Musk alliance strained over DOGE reforms,” April 20, 2025.
[⁹] IRS Newsroom, “IRS launches Large Partnership Compliance program,” September 2023.
[¹⁰] Forbes, “Trump rescinds partnership basis reporting rules via executive order,” April 21, 2025.
Originally published April 15, 2025. Updated April 22, 2025, to reflect new IRS leadership changes, regulatory actions impacting partnership basis reporting, and broader political pressures affecting agency independence.
