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LB&I Says More Audits Coming for Passthrough Entities

Posted on Feb. 11, 2020

The IRS’s future plans to audit partnerships go beyond the partnership audit regime in the Bipartisan Budget Act (BBA).

“In addition to implementing the new large partnership audit procedures enacted in BBA, [the IRS Large Business and International Division] has many ongoing efforts to increase the volume of audits for pass-through entities,” according to LB&I’s fiscal 2020 focus guide issued February 7. “Employees should expect to see more work in this area in the coming year and into the future.”

Under the centralized partnership audit regime, partnerships can be audited at the entity level, addressing an issue the IRS had struggled with for years when it typically had to go after partners. The regime allows for partnerships with fewer than 100 partners to elect out of it under some circumstances.

Practitioners have questioned whether electing out of the regime means the partnership is more likely to be audited later. In March 2019 Kathryn Zuba, IRS associate chief counsel (procedure and administration), said taxpayers could rest assured that electing out would have no effect on whether they would be audited.

Last year’s focus guide also listed implementing the partnership audit regime as one of LB&I’s major priorities, but it didn’t mention audits outside the scope of the regime. The IRS has been engaged in an overhaul of partnership reporting that should provide the government with more ammunition in increasing partnership audits.

The IRS data book released in May 2019 showed a sharp drop in the percentage of partnership returns being audited (0.22 percent of returns filed in fiscal 2018 compared with 0.38 percent in fiscal 2017).

Other priorities listed in the new focus guide include monitoring the changes to the compliance assurance process, improving the large corporate compliance program, and continuing work on campaigns.

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