
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rescinded in 2023 with a White House briefing reporting an agreement to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.