IRS Launches New Pass-Through Compliance Efforts Targeting Partnerships and Other High-Net-Worth Entities

While partnerships have long been on the Internal Revenue Service’s (IRS) enforcement radar, it has lacked the funding needed to target partnerships at scale and effectively audit large partnerships with billions of dollars in assets and annual revenue. But, this changed with the enactment of the Inflation Reduction Act in 2022. The IRS received a substantial budget increase under the Inflation Reduction Act, and it has begun using its additional funding to support several enforcement initiatives. This includes multiple initiatives targeting large partnerships and other high-net-worth pass-through entities. Learn more from Texas tax attorney Lawrence Brown.

The IRS Overhauled Its Audit Rules for Partnerships Other High-Net-Worth Entities in 2015

The IRS began taking particular interest in complex, multi-tiered, and high-net-worth partnerships and other pass-through entities more than a decade ago. This interest led to the enactment of the Bipartisan Budget Act (BBA) of 2015, which overhauled the audit rules for these entities. However, the IRS has lacked the funding needed to effectively implement these rules since the BBA’s enactment. As a result, its BBA centralized partnership audit regime has gone underutilized—until now.

Now, the IRS Has the Resources it Needs to Pursue High-Net-Worth Taxpayer Audits and Enforcement  

As we move into 2025, we are expecting to see a substantial increase in IRS audits targeting complex partnerships and other high-net-worth pass-through entities as a result of the agency’s Inflation Reduction Act funding. The IRS began auditing the largest pass-through taxpayers earlier this year, and in the past month, it has announced two new initiatives focused on high-net-worth entity compliance.

New Pass-Through Field Operations Unit Will Prioritize Partnerships and Other High-Net-Worth Entities

On October 22, 2024, the IRS issued a News Release announcing the formation of a new pass-through field operations unit. As the News Release explains, this new unit has already “officially started work in [the IRS’] Large Business and International (LB&I) division to more efficiently conduct audits of pass-through entities.”

Although the IRS’ new pass-through field operations unit will be auditing entities “of every size and form,” the agency has made clear that its priority is targeting complex, multi-tiered, and high-net-worth entities. While these audits require substantial resources, the IRS now has these resources available, and high-net-worth taxpayer enforcement is ultimately among the most efficient ways for the IRS to close the federal tax gap.

As the IRS also notes in its October 22, 2024 News Release, “[t]he stand-up of pass-through field operations meets one of the priorities of the [IRS’ 2024] Strategic Operating Plan” and “is also a significant part of the overall expanded enforcement efforts that focus on high-income and high-wealth individuals, partnerships and large corporations that have seen sharp drops in audit rates during the past decade.” This further underscores the IRS’ focus in this area, and it signifies that the agency’s focus is not likely to shift any time soon.

Newly Appointed IRS Assistant Chief Counsel Will Focus on Partnership Enforcement

A week after announcing the formation of its new pass-through field operations unit, the IRS issued another News Release announcing the appointment of a new Assistant Chief Counsel who will be tasked specifically with prioritizing enforcement among large partnerships and other high-net-worth pass-through entities. As stated in the October 29, 2024 News Release:

“[T]he Associate Chief Counsel for Passthroughs, Trusts and Estates . . . will coordinate and direct the activities of the [Passthroughs, Trusts and Estates Office] and oversee legal advisory services that support the uniform interpretation, application, enforcement and litigation of tax laws involving partnerships, S corporations, trusts and estates.”

The IRS’ new Associate Chief Counsel is expected to begin work in January 2025 and will most likely work in close coordination with the agency’s pass-through field operations unit and LB&I division. Given the IRS’ focus on “enforcement” (rather than “compliance”), we expect that audits targeting complex partnerships and other high-net-worth entities will present risks for substantial penalty and interest liability in many cases.

Prioritizing Pass-Through Tax Compliance Heading Into 2025

Given the IRS’s focus in this area, what should owners and executives of high-net-worth partnerships and other pass-through entities do to prepare for 2025?

1. Assess Their Current Risk

The first step is to assess their current risk level in light of their (and their owners’) past federal tax filings. Owners and executives of high-net-worth partnerships and other pass-through entities should engage experienced tax counsel to examine their filing histories and determine whether any issues present risks for IRS enforcement. In the event of an audit, it will be critical to know what issues (if any) the IRS is likely to raise, and entities should proactively remedy enforcement concerns as necessary (as discussed below).

2. Ensure Compliance for the 2024 Tax Year

Large and complex partnerships and other high-net-worth pass-through entities should also work closely with their tax counsel to ensure compliance for the 2024 tax year. The IRS is increasingly relying on automated technology to examine taxpayers’ filings as a matter of course, and if this examination raises any red flags, this could expedite an audit into the entity’s current and past filings.

3. Take Remedial Action if Necessary

If the assessment of the entity’s current risk uncovers issues that need to be addressed, the entity should also work with its tax counsel to take appropriate remedial action promptly. What this entails will depend on the nature of the issue (or issues) uncovered and the specific circumstances involved. In some cases, submitting an amended filing may be sufficient. In others, however, entity owners and executives may need to consider alternatives such as submitting a voluntary disclosure and working to negotiate a settlement agreement with the IRS.

Request a Call with Texas Tax Attorney Lawrence Brown

Texas tax attorney Lawrence Brown has extensive experience representing high-net-worth partnerships and other pass-through entities in high-stakes IRS audits. If you have questions or concerns about facing scrutiny from the IRS, we invite you to contact us. Call 888-870-0025 or contact us online to request an appointment today.