The Internal Revenue Service is
shifting its small-business audit focus from corporations to
various types of partnerships as those entities have grown more
prevalent and complex, according to an agency official.
Examining the returns from partnerships and other so-called
pass-throughs will be the “top priority” of the IRS’s Small
Business/Self-Employed Division over the next year and beyond,
said Faris Fink, the head of the office. As part of that shift,
more and better training of IRS agents is needed, Fink said at
the American Institute of CPAs National Tax Conference last week
in Washington, Bloomberg BNA reported.
“The Service has for a long time focused its energy on
corporations,” he said. “Frankly, we’re a little bit behind
the curve in getting around to developing a partnership
strategy.”
Pass-throughs, which include S corporations and sole
proprietorships, are businesses that don’t pay income taxes
directly. Instead, their income is passed through to their
owners who pay taxes on it on their individual returns. Pass-throughs comprise almost 95 percent of all U.S. business
entities, according to IRS statistics.
Between 2007 and 2011, the number of partnerships grew by
15.3 percent and now constitute a significant percentage of
returns for both IRS’s small business division and the Large
Business International Division, Fink said.
Training Issue
For IRS employees, challenges they face due to a lack of
experience and training in auditing these entities are
accentuated by the complexity of modern partnership structures,
he said. The IRS now sees partnerships with 82,000 partners and
structures ranging from 125 to 182 tiers, Fink said.
“Frankly, our training was not geared for dealing with
those types of large, complex partnerships,” he said.
“Historically, we would think of a partnership of having, say,
10 partners” with a limited number of tiers.
The IRS also is aware that the way some large partnerships
are organized is partly designed to make it tough for the agency
to identify substantive transactions by the businesses, Fink
said.
“We as an organization have recognized that this is
something that we’ve got to be paying attention to, not just
this year, but going forward,” he said.
The IRS increased training on partnership issues for field
examiners and revenue agents during the last year, Fink said.
Addressing tax preparers, he also said, “It’s going to be
challenging for you, because you’re going to be interacting with
some of those folks.”
Research Program
In other comments at the conference, Fink said taxpayers
and tax practitioners should be able to more easily access
information from the IRS’s multiyear National Research Program.
The program randomly selects a certain number of returns over
several years to track new areas of taxpayer noncompliance and
to develop better strategies for audits.
“We’re going to try to be a little more transparent as far
as sharing information from the NRP,” he said. “For a while,
organizationally, we’ve treated it pretty much as ‘top secret’
information and that we wouldn’t share it with anybody, as if
we’d be giving away our trade secrets and we could always go out
and say ‘we got you.’”
The new goal will be to make the information available so
tax preparers “can be educated on the issues that we’re seeing
and so that you can better educate your clients,” he said.
The availability of the information will depend on the
progress of each individual research project, Fink said. The IRS
is running simultaneous programs to examine returns with
individual taxpayer, employment, fuel tax and corporate tax
issues, he said.
To contact the reporter on this story:
Lydia Beyoud in Washington at lbeyoud@bna.com
To contact the editor responsible for this story:
Brett Ferguson at bferguson@bna.com