Partnerships and IRS organizational changes

The IRS has changed its organizational structure to support its SOP, which sets forth how the IRS will use increased funding from the Inflation Reduction Act of 2022. The new structure consolidates two deputy commissioner positions, the deputy commissioner for services and enforcement and the deputy commissioner for operations support, into a single deputy commissioner. Four chiefs report to the deputy commissioner, including a new chief taxpayer compliance officer.

The chief taxpayer compliance officer supports the SOP goal of increasing enforcement for large corporations, complex partnerships, and high net worth individuals. To further facilitate this goal, a new pass-through entities (PTE) practice area in the Large Business and International (LB&I) Division is responsible for audit and compliance activities for partnerships and other pass-through entities. Revenue agents in PTE come from LB&I, the Small Business/Self-Employed Division, and the pool of newly hired revenue agents. PTE’s partnership audit strategy uses an enterprise approach, meaning that the entire partnership structure, including related nonpartnerships, could be included in an audit.

Crowe observation

An enterprise approach likely will reduce the audit no-change rate, but it could increase the time it takes to close an audit and increase taxpayer burden.

The IRS Chief Counsel’s office is changing as well. The Office of the Associate Chief Counsel (Passthroughs and Special Industries) will be split into two offices – one with jurisdiction over partnership, S corporation, trust, and gift and estate tax issues and another with jurisdiction over credits and incentives and excise tax.

Crowe observation

IRS chief counsel field offices also could be reorganized to better align with the new IRS organization.

In light of these organizational changes, taxpayers should consider four key takeaways:

• More pass-through entities are being audited. The number of pass-through entity audits, especially partnership audits, has increased dramatically. As PTE’s enforcement strategy matures, this trend is likely to continue. Partnerships that were never audited before should not be surprised if they are selected for audit. Additionally, the IRS’ enterprise approach and improved audit selection data analytics could increase the number of adjustments resulting from these audits.
• Auditors are better trained on partnership issues. Historically, LB&I auditors focused on corporate tax issues. This trend is changing. Increased hiring and training in partnership tax means that more revenue agents will be available to audit complex partnership returns.
• Partnership audits are subject to the complexity of the BBA audit rules. The Bipartisan Budget Act of 2015 (BBA) partnership audit regime is complex and difficult for taxpayers to understand and navigate. While the IRS is providing training on the BBA, the procedures under it are new for IRS personnel and might not always be correctly applied. Taxpayers represented by tax advisers who are knowledgeable in partnership tax and the BBA will be in the best position to effectively manage these audits.
• Audit results will inform future compliance initiatives. The historical low partnership audit rate has hindered the IRS’ ability to identify areas of partnership noncompliance. Increased partnership audits will allow the IRS to improve identification of potential noncompliance and better deploy audit resources.

Looking ahead

The IRS’ new organization better aligns with its initiative to increase enforcement of large and complex taxpayers. Combined with increased hiring and partnership training, the new organization structure has more agents who can audit complex partnership returns. Taxpayers that engage tax advisers with knowledge and experience in partnership tax and partnership audit procedures will be in the best position to successfully resolve a partnership audit.