The IRS has established a special unit to focus on large or complex pass-through entities, as part of its overall effort to devote more attention to high-income compliance issues.

The new work unit will be housed in the IRS Large Business and International (LB&I) division and will include some of the 3,700 new employees joining the IRS under the new IRS hiring initiative announced last week.

This initiative is part of larger transformation to expand efforts to increase the audit rates of “high-income and high-wealth individuals, complex partnerships, and large corporations who are not paying the taxes they legally owe," as IRS Commissioner Daniel Werfel wrote in a Sept. 18 letter to U.S. Sen. Ron Wyden (D-Ore.), chair of the U.S. Senate Committee on Finance.

"This is another part of our effort to ensure the IRS holds the nation's wealthiest filers accountable to pay the full amount of what they owe," Commissioner Werfel said in a statement about the new pass-through unit. "We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns. This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come."

Pass-through organizations include such entities as partnerships and S-corporations. These groups are not subject to the corporate income tax; instead, income is "passed through" onto the income tax returns of the individual or corporate owners and taxed at their income tax rates. Pass-throughs are frequently used by higher-income groups and can be complex tax arrangements, according to the IRS.

LB&I Commissioner Holly Paz announced the creation of the new pass-through unit during a speech at a Tax Executives Institute meeting in New York.

“This is an important change we will be making, and we will be working in the months ahead to efficiently and effectively transition to this new group,” Paz said. “This effort will include working inside the IRS, as well as working with external partners, to ensure this is a smooth transition period for everyone involved.”