Back in October 2021, the Internal Revenue Service’s (IRS) Large Business and International (LB&I) division announced the Large Partnership Compliance (LPC) program. This new audit program adopted features of the Large Corporate Compliance (LCC) program, such as its audit selection method. Similar to the LCC’s audit selection process, the LPC’s audit selection process has two general steps. The first step subjects large partnership returns to a basic automated review of certain key threshold criteria (e.g., gross assets and gross receipts). The second step further refines the pool through data analytics and artificial intelligence tools, which have been recently enhanced by enforcement funds from the Inflation Reduction Act of 2022. LB&I personnel, specifically those in the Pass-Through Entity office, review the preliminary audit pool and make the final call for selection.
Accompanying LPC technological improvements in the audit selection process, the LB&I announced a new pass-through entity work unit: “The new work unit will be housed in the IRS Large Business and International (LB&I) division” and “will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe.” (See IR-2023-176 (September 20, 2023).) New hires in this unit will focus on those with financial services experience. (See IR-2023-172 (September 15, 2023) (reporting plans to hire 3,700 agents “well versed in the financial services industry”).) This announcement came on the heels of an earlier announcement that by the end of September 2023, the LPC will begin audits of 75 of the largest US partnerships, including hedge funds, real estate investment partnerships and publicly traded partnerships. (See IR-2023-166 (September 8, 2023).)
Practice Point: Because of the significant resources devoted to the LPC program, these audits promise to be thorough and will be conducted by an LB&I exam team primed to find substantial audit adjustments. To successfully navigate these audits, partnerships should work to ensure that the IRS examination team sticks to the timeline, respond timely to all reasonable requests for information, and be prepared to assert all applicable privileges, such as the attorney-client privilege, Internal Revenue Code Section 7525 privilege, and work product where appropriate. We anticipate that aggressive IRS examination teams will try to obtain this information over a partnership’s initial objections on these grounds. It’s never too late to prepare for an IRS examination, and if you are a large partnership, it’s in your best interest to consult with your tax team now!