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Update on IRS Enforcement Efforts

We frequently post about the Internal Revenue Service’s (IRS) tax enforcement trends and announcements. Prior examples from this year include the release of a five-year strategic plan emphasizing enforcement, the plan to hire up to 200 additional attorneys to assist with litigation efforts, the implementation of the Large Partnership Compliance (LPC) Pilot Program, a focus on tax compliance of non-US citizens and residents, and the creation of a new Joint Strategic Emerging Issues Team to identify emerging “abusive transactions.” Over the past several weeks, the IRS has provided additional updates on its enforcement efforts and future plans, including the following:

  • The IRS is considering raising the economic substance doctrine more frequently in transfer pricing examinations—even those where taxpayers have transfer pricing documentation—and asserting penalties more often in transfer pricing cases. This follows the announcement last April that executive approval is no longer needed before asserting the codified economic substance doctrine under Internal Revenue Code Section 7701(o).
  • The IRS plans to grow the LPC program and envisions it functioning similar to corporate examinations conducted by the Large Business & International Division.
  • The IRS’s Criminal Investigation (CI) Division is highly focused on criminal digital asset cases and intends to make many of these cases public. This follows the recent release of the CI Division’s annual report.
  • The IRS intends to expend more resources on examinations of high-income/high-net-worth taxpayers.
  • The IRS has proposed to require the disclosure of more information regarding corporate taxpayers’ uncertain tax positions, including citations to contrary authorities, which, if finalized, will likely lead to more examinations and challenges to tax reporting positions.

Practice Point: Tax enforcement has been down over the past several years, including a slowdown in audit operations during the COVID-19 pandemic. With increased funding from the Inflation Reduction Act of 2022 and proposed restrictions on access to IRS Appeals for certain matters, we expect more examinations and tax disputes in the near future. Taxpayers and their advisors should prepare. Consider working with your tax controversy advisor to discuss your more vulnerable return positions to see how to better defend against the impending tax enforcement wave!




IRS Official Provides Update on Large Partnership Compliance Audits

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.




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