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IRS Strengthens Its Large Partnership Audit Teams

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!

Weekly IRS Roundup September 4 – September 8, 2023

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 4, 2023 – September 8, 2023.

September 5, 2023: The IRS released Internal Revenue Bulletin 2023-36, which includes proposed regulations implementing the Mental Health Parity and Addiction Equity Act of 2008.

September 5, 2023: The IRS released Tax Tip 2023-108, outlining basic tax advice for entrepreneurs who want to start a new business. The Tax Tip addresses business structures, selecting a tax year, employer identification numbers and reminds taxpayers to investigate applicable state tax requirements.

September 5, 2023: In light of September being National Preparedness Month, the IRS reminded taxpayers to develop an emergency preparedness plan and outlined steps for mitigating losses during a disaster.

September 5, 2023: The IRS issued Fact Sheet 2023-20 to explain how pass-through entities that are electronically filing Schedules K-2 and K-3 should report negative amounts, which are not permitted for certain line items. The Fact Sheet cautions that the IRS has not opined on whether it is legally appropriate to use negative values.

September 6, 2023: The IRS released Tax Tip 2023-109, providing advice to taxpayers who are still considering a tax return preparer.

September 6, 2023: The IRS extended tax relief to individuals and businesses impacted by Hurricane Idalia in South Carolina. As a result, affected individuals filing personal income tax returns on extensions expiring on October 16, 2023, calendar-year partnerships and S corporations whose extensions expire on October 16, 2023, and calendar-year corporations whose 2022 extensions expire on November 15, 2023, now have until February 15, 2024, to file returns and pay related taxes.

September 6, 2023: The IRS announced that the application period for the 2024 Compliance Assurance Process (CAP) program is now open and will run from September 6 to October 31, 2023. The IRS will inform applicants if they’re accepted into the program in February 2024. The CAP program enables taxpayers and the IRS to resolve issues before filing tax returns. To apply, applicants must (1) have assets of $10 million or more, (2) be a US publicly traded corporation with a legal requirement to prepare and submit US Securities and Exchange Commission Forms 10-K, 10-Q and 8-K, and (3) not be under investigation by, or in litigation with, any government agency that would limit the IRS’s access to current tax records.

September 6, 2023: The IRS reminded taxpayers who pay estimated taxes that the deadline to submit their third quarter payments is September 15, 2023.

September 8, 2023: The IRS announced it will be dedicating greater resources to wealthy taxpayers. As part of this effort, the IRS will ensure audit rates do not increase for those earning less than $400,000 a year and will add new fairness safeguards for those claiming the Earned Income Tax Credit. The IRS [...]

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