In late 2023 and throughout 2024, federal investigators uncovered millions of dollars in fraudulent tax credits issued to fictitious daycare centers; many of which had no children, no staff, and no physical presence beyond a mailbox or an empty lot. Some locations turned out to be self-storage units which is a bold move for anyone claiming to watch toddlers.
Those cases sparked reforms at the IRS. Their response has been swift and structural: no more trust without verification. This year marks the first filing season in which the IRS’s upgraded enforcement tools are fully operational, and tax professionals are preparing clients for possible refund delays.
Where once compliance was assessed primarily through the accuracy of submitted tax forms, the agency now focuses on verifying whether the claims reflect real-world economic activity. As tax researcher Olubukola Sanni explains, “Modern tax enforcement pivots on data integrity and real-time verification through third-party channels – far beyond the legacy reliance on self-reporting” (1). This shift represents more than a policy update; it’s a change in philosophy and blind trust.
IRS modernization is not rooted in suspicion but in experience. The pandemic and subsequent relief programs exposed wide vulnerabilities in a system built on good faith. Refundable credits, emergency grants, and rapid disbursements created a perfect storm. Testimony before Congress highlighted that improper payments often occurred not due to bad math, but because there were no early-stage controls confirming that filers were entitled to the funds they claimed.
In response, the IRS has developed a more proactive enforcement model designed to detect inconsistencies before refunds are issued. Now if a tax return reports income, childcare expenses, or educational credits that don’t align with external records, the refund could be delayed or flagged for additional documentation even if the return was filed correctly on paper.
For individual taxpayers, the experience of filing may feel the same, but standards behind the scenes have shifted. Simple W-2 earners who take the standard deduction may not notice any difference. However, those claiming refundable credits, reporting business income, or deducting activity-based expenses should be aware of the new scrutiny. The IRS is paying closer attention to claims that previously sailed through on self-attestation alone.
Credits tied to dependents, education, energy efficiency, and childcare are now subject to enhanced verification. For example, the Child Tax Credit and Earned Income Tax Credit require confirmation that dependents live in the household and meet supported criteria. Similarly, energy credits for home improvements now require documentation including installation receipts and manufacturer certifications. Even the Child and Dependent Care Credit, long considered routine, has been targeted following daycare fraud exposure.
Those reporting rental real estate income are also affected. The IRS is not targeting rental owners directly, but it is focusing on whether rental properties are being operated as legitimate businesses. Filers claiming losses year after year, asserting real estate professional status, or engaging in short-term rental activities may be asked to provide licensing documents, repair records, and evidence of active participation.
These checks and balances simply reflect the agency’s goal of confirming that tax positions reflect genuine economic behavior. The Tax Policy Center notes, “In FY 2025, IRS performance metrics explicitly track pre-refund verification success, fraud prevention, and third-party data matching outcomes” (2). The emphasis is not on increasing audits but on preventing improper payments and ensuring accuracy.
To adapt to this environment, filers are advised to think ahead. Maintaining thorough records, choosing service providers with valid tax IDs, and avoiding last-minute returns will all reduce the risk of delay. Claims should be consistent year after year and supported with clear receipts, 1098-T forms, licensing records, or other appropriate documentation.
Tax scholar Elaine Cauble, who studies how tax law information is transmitted (and often misinterpreted) within the system, observes: “The IRS now conditions the release of many credits not on self-attestation but on verified employer or platform-based documentation” (3). In this new climate, truth backed by proof is the standard.
The IRS’s move toward pre-verification is part of a broader push to modernize and protect the integrity of the tax system. While it may add friction for some returns, it helps ensure that claims reflect real economic activity and that public funds go where they’re intended.
Financial advisors, including Apella Wealth and your tax preparer, continue to play a key role in helping you prepare, track, and organize the details behind your tax filings. Keeping your advisors financially informed throughout the year allows them to assist in the process – archiving important documentation, identifying risks early, and providing professional support if the IRS requests verification. Speak with your advisors about upcoming filings and ways they can best support you and streamline the process this filing season.
References
(1) Sanni, Olubukola. Taxpayer Data Protection: The Cybersecurity Imperative. ResearchGate, 2025. https://www.researchgate.net/publication/397649832_Taxpayer_data_protection_The_cybersecurity_imperative.
(2) Holtzblatt, Janet. Measuring Success: New Performance Metrics for a New Internal Revenue Service. Tax Policy Center, 2024. https://taxpolicycenter.org/sites/default/files/publication/166046/measuring-success-new-performance-metrics-for-a-new-internal-revenue-service.pdf
(3) Cauble, Elaine. Channels of Tax Law (Mis)Information. University of Wisconsin Legal Studies Research Paper, 2025. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5212746.
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