The Internal Revenue Service (IRS) is intensifying its scrutiny of large partnerships, leveraging additional funding provided by the Inflation Reduction Act of 2022 (IRA). This boost has enabled the IRS to ramp up enforcement efforts, particularly targeting large corporations, complex partnerships, and high-net-worth individuals. Last year, the IRS restructured its leadership to support its Strategic Operating Plan, using the IRA’s funding to bolster compliance. As part of this effort, a new team within the Large Business and International (LB&I) Division focuses specifically on audits and compliance for partnerships, with more agents trained to handle these intricate cases.

A notable initiative is the large partnership compliance program, which has selected 76 entities for audits. According to Rochelle Hodes, a principal at Crowe LLP, partnership audits have increased significantly. She expects the IRS’s improved training and issue selection will start reflecting in more examinations soon, with better-trained agents working on complex partnership returns.

The additional funding from the IRA has allowed the IRS to expand its workforce, which previously operated with limited resources. Hodes points out that before the IRA, auditors experienced in corporate tax issues were being moved to partnership audits without sufficient training. This created inefficiencies, but now, with more agents being properly trained in partnership matters, there is expected to be more consistency in the examination process.

Historically, the Small Business/Self-Employed (SB/SE) Division also audited partnerships, focusing on issues like employment taxes and accounting methods, but they often lacked expertise in partnership-specific issues. With the new Pass-through Entities Practice Area, led by Cliff Scherwinski, the IRS is combining SB/SE and LB&I resources to improve training and auditing of partnerships.

The IRS’s implementation of the Bipartisan Budget Act (BBA) of 2015 introduced a centralized partnership audit regime, which took longer than anticipated to fully roll out. Early on, agents were unfamiliar with BBA procedures, but Hodes believes the IRS has since made strides in improving consistency, particularly through team-based training and knowledge transfer.

One of the main changes brought by the BBA is the notice of proposed partnership adjustment (NOPPA), a formal process that starts a clock for taxpayers to request an appeal. This allows taxpayers to review and potentially resolve issues before the final adjustment. Hodes notes that while audits are never welcome, a smoother process with knowledgeable agents can ease some of the burdens for taxpayers.

The IRS is now focusing more on partnership audits, with increased consistency and better-trained auditors. As taxpayers face more audits under the BBA, this shift should lead to a more efficient process. While the IRS continues to improve its partnership audit procedures, potential changes in partnership legislation remain possible, depending on the outcome of ongoing political developments.

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