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GAO: IRS Can Use New Funding to Audit More Large Partnerships

S.J. Steinhardt
Published Date:
Jul 28, 2023


The IRS audits few large partnerships, and it can use the extra funding provided by the Inflation Reduction Act to strengthen its audit processes to address the growing numbers of these partnerships, the Government Accountability Office (GAO) found.

A partnership is generally an unincorporated organization with two or more members that conducts a business and divides profits, the report explained. Such partnerships do not pay income taxes as entities, but pass the net income or losses to partners, such as individuals or corporations, who then report the income and pay any applicable taxes.

Between 2002 and 2019, the number of large partnerships with more than $100 million in assets and 100 or more partners grew by nearly 600 percent, the report found. The IRS’s audit rate of such partnerships has declined since 2007 to less than 0.5 percent, with only 54 of them being audited in tax year 2019, the report found.

More than 80 percent of IRS audits of large partnerships in tax years 2010 to 2018 did not find tax noncompliance, on average, double the rate of large corporate audits. That figure suggests that the IRS is not choosing the riskiest returns to audit or does not know how to find noncompliance in these businesses, according to Accounting Today.

The Inflation Reduction Act provided the IRS with $45.6 billion for enforcement activities through the end of fiscal year 2031. In response, the IRS identified large partnerships as an enforcement priority. About $1.4 billion of this funding was rescinded in 2023 with a White House briefing reporting an agreement to reduce future funding by $20 billion, the report stated.

The “relatively low rate at which IRS audits large partnerships raises concerns about IRS’s ability to ensure tax compliance among these businesses,” the report states, despite the agency’s stated objective to use the enforcement funding under the Inflation Reduction Act to expand audits of large, complex partnerships. The agency had previously attributed its inability to audit large partnerships to resource constraints, but the GAO noted that the billions provided by the Inflation Reduction Act now provide for enforcement activities such as these.

The report also found that "IRS officials have no definition or guidance of complexity and an overly broad definition of a large partnership," adding that the IRS "also does not have specific metrics for tracking large partnership audits. Developing a definition and more specific metrics would help IRS measure progress toward its goals and track audit results and costs."

The GAO made four recommendations: using representative sampling of partnership returns to identify additional noncompliance; improving its partnership models through data analysis; defining large, complex partnerships and their characteristics; and developing guidance to define and measures to track large and complex partnership audits.

The IRS agreed with the recommendations.

“The funding brought about by the Inflation Reduction Act significantly changes the calculus of what is feasible and positions the agency to successfully execute on several fronts to improve tax administration of and compliance for large partnerships," Douglas O'Donnell, IRS deputy commissioner for services and enforcement, told Accounting Today in response to the report. "Taxpayers and advisers would be well served to review their tax positions and ensure they are in a supportable posture as the IRS looks to significantly increase its commitment to this important component of tax administration. As we refine and execute on our strategy, we will be focused on data analytics, both in terms of data currently received and/or available, but also considering adjustments to tax forms that would support compliance and assist the partners in correctly filing their tax returns."

O’Donnell also said that the IRS will continue its efforts to hire more experienced tax professionals to help with audits.

To learn more about the taxation of partnerships, attend the Best S Corporation, Limited Liability, and Partnership Update Course by Surgent Webcast on Aug. 23 or on Sept. 28.


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