On September 20, 2023, the IRS created a new workgroup to substantially expand enforcement efforts related to pass-through organizations not subject to corporate income tax, including partnerships and S-corporations. The new unit, established under the Large Business and International (LB&I) division, signals that the agency is getting serious about auditing partnerships and business organizations.

Formal operations are expected to begin in late 2024. In the meantime, pass-through entity enforcement will continue to build its inventory of examinations of large partnerships. That campaign, announced earlier this month, will aim agency resources on the wealthy, complex partnerships, large corporations, and other high income earners.

Commissioner Danny Werfel described the new team and compliance campaign as a way to hold filers accountable and to hone-in on areas the agency believes non-compliance has grown due to budget cuts spanning the last decade. The Commissioner discussed the agency’s plans to use increased funding from the Inflation Reduction Act of 2022 (IRA) to prevent large partnerships using pass-throughs to “intentionally shield income to avoid paying the taxes they owe.”

To further these goals, the IRS is using IRA funding to hire 3,700 new employees with backgrounds in accounting and financial services for “specialized technical positions” focused on complex partnership audits.

The IRS is also using IRA funds to improve technology, expand Artificial Intelligence used to identify compliance risks and improve case selection for partnerships, and address balance sheet discrepancies for partnerships with greater than $10 million in assets. Notably, the agency expects to ramp up balance sheet scrutiny in early October 2023, when it will mail compliance letters to approximately 500 large partnerships. Depending on responses, this could result in a significant increase in partnership audits.

Taxpayers need to be aware of the agency’s expanded compliance efforts as audit rates continue to increase for high earners, large corporations, and partnerships. Taxpayers should consider reviewing their returns for discrepancies in anticipation of an IRS explanation request.