IRS Program for Auditing Large Partnerships to Begin Soon

Last month the IRS released a revised Publication 5319, the Large Business and International (LB&I) Focus Guide for fiscal year 2022. In recent editions of Beyond the Bottom Line, we have discussed the outlook for greater compliance efforts by the IRS than we have seen in recent years. The President’s tax policy agenda includes measures for additional funding for the IRS over the next ten years to address the tax gap. Even without the passage of the President’s plan, 2022 fiscal year funding for the IRS exceeds funding in recent years.

The most important line in Publication 5319 may be “You will see continued focus on longstanding initiatives such as improving work selection, increasing partnership audit coverage and launching new campaigns to address noncompliance.” The Publication goes on to say that LB&I expects to increase its coverage in the pass-through area and will expand its partnership work by soon launching the Large Partnership Compliance Program (LPC).

From the most recent IRS Data Book released, we know that partnership tax returns have had one of the lowest audit selection rates (percentage of total returns filed selected for audit) of any category of federal income tax returns filed. The number of partnership returns filed has dramatically increased compared to other business income tax filings such as C corporation and S corporation returns. The special allocations and other flexibility in the tax law afforded to partnerships also makes it a very complex area ripe for unintentional (and perhaps, at times, intentional by some taxpayers) misapplication of the tax laws, or at least significant disagreement over the interpretation of those laws. All of these factors and the recent changes in IRS procedural rules for partnership audits make the expected increase in audits of partnerships expected.

If a partnership return is selected for audit, the IRS mails an initial notice only to the partnership. The IRS uses Letter 2205-D to notify all partnerships (TEFRA, Non-TEFRA, BBA and BBA elect-outs) regardless of the tax year. The partnership will receive a Letter 2205-D for each year under examination.

If you receive a Letter 2205-D, or other notification of selection of examination, please reach out to your contact at BMSS immediately. Prompt representation by the tax preparer can be an important foundation for setting up a favorable audit experience.