The IRS recently announced the launch of new, more aggressive audits targeting large partnerships, backed by cutting-edge artificial intelligence technology and increased funding. This move comes in response to the significant growth in the number, size, and complexity of these entities in recent years.
Historically, the IRS audited less than 1% of large partnerships annually. However, armed with AI tools and additional resources, the agency has initiated over 76 new audits focusing on some of the largest partnerships nationwide, particularly those with assets exceeding $10 billion. These audits encompass a wide range of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms.
Critical to the IRS’s enforcement strategy is the use of AI to help identify potential audit targets, especially in complex partnership transactions like basis-shifting transactions between related parties. While AI plays a crucial role in these decisions, human tax experts carefully supervise the selection process. The IRS is establishing a new team in the Office of Chief Counsel to develop partnership guidance further, including new types of reportable transactions. Additionally, the agency plans to enhance technical training programs for revenue agents and economists reviewing large partnership returns to boost their effectiveness.
Partnerships selected for audits should be prepared for a potentially lengthy process under the Bipartisan Budget Act (BBA) audit rules. While these rules aimed to streamline audits, both the IRS and taxpayers are grappling with uncertainties and unexpected complexities. The IRS is now better equipped to conduct partnership audits efficiently, urging large partnerships to familiarize themselves with BBA audit rules and prepare accordingly.
To mitigate risks and streamline audits, partnerships should update their agreements to include provisions on audit conduct, partner communication, and handling of audit-related decisions. Notably, under the BBA rules, partnerships default to paying any assessed underpayment unless they opt for the push out alternative, shifting adjustments to partners. Defining upfront how imputed underpayments will be handled is crucial for partnerships.
The IRS’s enhanced focus on large partnership audits signifies a significant enforcement priority for the agency. With increased funding, advanced technologies, and specialized training, the IRS aims to strengthen the scope and efficiency of audits, targeting high-risk and high-value returns. Large taxpayers are advised to proactively prepare for potential audits to avoid any compliance issues.
In conclusion, the IRS is ramping up its efforts to address non-compliance among large partnerships, ushering in a new era of more rigorous enforcement. Large partnerships must stay vigilant, understand the intricacies of BBA audit rules, and ready themselves for potential audits to navigate the evolving regulatory landscape successfully.
