Almost 11 months ago, the Internal Revenue Service (IRS) released a memorandum regarding the implementation of the Large Partnership Compliance (LPC) Pilot Program, including the identification, selecting and delivery of large partnership tax returns, exam procedures and feedback. The goal of the LPC program is to identify the largest partnership cases and develop improved methods for identifying and assessing the compliance risks presented by these taxpayers. Large partnerships include those with more than $10 million in assets, and such partnerships are subject to data analytics and classification processes. Audits of these large partnerships are conducted by the Large Business & International (LB&I) division.
The LPC program was discussed at the recent Tax Executives Institute conference in New York. IRS officials noted that 50 large partnerships have been selected for the first round of audits, focusing on the 2019 tax year. The IRS currently is undecided as to whether LB&I plans to audit subsequent year returns for the selected partnerships, but likely will not subject such partnerships to a continuous audit process that is used for many large corporate taxpayers.
An interesting discussion took place at the conference related to whether IRS revenue agents will share with the selected partnerships the risk level assigned to their partnership return and which issues will be examined. (Risk assessment and identification of issues are generally included in audit plans for corporate taxpayers, although the level of risk may not necessarily be disclosed.) Currently, some agents are providing such information to selected partnerships but there is no consensus or standard practice at the audit level.
Practice Point: The IRS has made it well known that large partnerships are on their radar and there is a need to focus on these audits to ensure taxpayer compliance. In our experience, revenue agents tend to be more transparent in audits of large taxpayers when it comes to the issues under examination, but it would be a welcome development if the IRS announced at the outset of the audit more standard procedures for informing taxpayers of the risk levels assigned. As the LPC program continues, we are hopeful that the IRS will decide to share more data with the public. We expect an increase in audit activity as a result of additional funding received by the IRS, and it appears that the IRS will focus those efforts on large partnerships.