Reading the 2025 IRS Numbers: What Small Owners Should Do Now
Even with a smaller staff, the IRS is catching missing and mismatched returns through automation. Alongside new deductions for tips and overtime, here's a practical checklist for owners this year.
Kwon CPA
The IRS just released its data book covering fiscal year 2025. It's a wall of numbers, but for a taxpayer running a cafe, restaurant, laundromat, cleaning crew, construction outfit, or shop, only the signals that affect the business matter. Here's the short version: the IRS has fewer people, but it's catching more through computers. And starting this season, new deductions for things like tips and overtime are showing up in real refunds.
Fewer people, but smarter enforcement
Many business taxpayers assume a smaller IRS budget means a more relaxed IRS. The data says the opposite. Live audits came in around 497,000 — modest on their own. But through its Automated Underreporter program, the IRS closed 987,460 cases and assessed $5.9 billion. On top of that, the Automated Substitute for Return program handled 592,773 cases for nearly $2.9 billion.
What does this mean in plain terms? It's not an agent walking into the shop. It's a computer matching the return filed against the 1099s the card processor and bank sent, and the W-2s employees got. If the numbers don't line up, a letter comes. That's a system, not luck.
The IRS doesn't come looking for taxpayers anymore — a computer just checks whether the paperwork agrees with itself.
The real risk is mismatched numbers, not an audit
For a small business taxpayer, the trouble that actually shows up is rarely a big formal audit. It usually looks like this:
- The 1099-K from the card processor reports more than the sales on the return
- A subcontractor was paid in cash and never received a 1099
- Employee tips weren't reported, so the W-2 and the return don't agree
- Personal and business accounts got mixed, and certain deposits can't be explained
These gaps get caught by the system without a single person reviewing them. So the goal isn't "don't get caught" — it's "make the numbers match from the start."
- Reconcile the 1099-K against the books every month
- Get a W-9 first, then issue a 1099 for anyone paid $600+ in a year
- Record employee tips accurately in payroll
- Run business money through one business account
- Estimating cash sales "from memory" at filing time
- Deducting expenses but skipping the 1099
- Buying supplies on a personal card and losing receipts
- Saving all reconciling for one rushed pass in December
The new deductions: tips, overtime, car interest, seniors
Last year's law created new deductions, and this filing season was the first to reflect them. Per the IRS data, about 45% of individual returns claimed at least one of these, and those returns averaged refunds over $3,200.
For a taxpayer running a tipped business like a restaurant, cafe, or laundromat, or an overtime-heavy trade like construction or cleaning, this touches both the business and employees directly. But there's a catch: the benefit only works if the records are clean. A shop that has been underreporting tips ends up with weak support for the deduction.
The tip and overtime deductions apply on the worker's personal return. When tips and overtime are reported accurately on the W-2, employees can actually claim these breaks. Accurate payroll reporting turns into a real refund in their pockets.
Skip filing, and the IRS files instead
The most expensive mistake is "this year's complicated, I'll do it later." When a taxpayer doesn't file, the IRS builds a substitute return. The problem is it's built against the taxpayer — no deductions, no expenses, no dependents. It taxes gross sales, so the bill lands far higher than reality.
In FY2025 the IRS assessed $29.6 billion in additional taxes tied to returns not filed on time. And of roughly 38,800 offers in compromise to settle for less, only 5,464 were accepted. In other words, once it's assessed, it's hard to knock down. Filing accurately — even late — almost always beats letting the IRS write the return.
What to check right now
- Gather every 1099-K, 1099-NEC, and W-2 from last year and match them to the books.
- Separate business and personal accounts, and run all business activity through one account for the rest of the year.
- List everyone paid $600+ as a subcontractor or freelancer and collect their W-9s.
- If the business has tips or overtime, confirm the payroll system records them correctly.
- If any prior year went unfiled, don't wait for a letter — build a cleanup plan with an accountant first.
The IRS direction is clear: fewer people, more automated matching. So the taxpayer's job is clear too — not clever tax tricks, but clean records where the numbers agree with each other. At Kwon CPA, our principle has long been the same: pursue tax savings while preparing returns that can stand up to the IRS's increasingly automated review systems.
That is why we continue to digitize our work for the AI era, operate the Florink portal to help clients collect and organize records, and build our Operation Wellness program to support healthier business operations throughout the year. When records are organized, tax savings have support, audit risk goes down, and the automated letters are less likely to arrive. If getting organized feels overwhelming, don't carry it alone — reach out, and Kwon CPA can line it up one row at a time.
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