The IRS recently announced its plan to utilize its Inflation Reduction Act funding to shift its enforcement efforts on a certain subset of filers in an attempt to “restore fairness in tax compliance.” One such subset of filers specifically mentioned in the bulletin are large complex partnerships, of the type commonly seen in the various fund structures prevalent in the asset management space.
In late 2021 the IRS Large Business and International (LB&I) Division launched the Large Partnership Compliance (LPC) Pilot Program to use data analytics to identify large partnerships for audit. With enhanced funding from the Inflation Reduction Act, the IRS is doubling down on these efforts, investing in artificial intelligence programs to aid with the identification of filers presenting potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax. Currently, the plan is to open audits on the 75 largest partnerships in the U.S. over the course of the coming months, partnerships that represent a variety of industries, including players in the asset management space. Over the course of these audits, the IRS will look to learn more about the risks presented by these complex partnerships to further develop its approach to identifying partnerships for exam in the coming years.
In addition to general audits of some of the larger and more complex partnerships, the IRS has announced that it will be utilizing its AI technology to identify partnerships with over $10 million in assets where there are discrepancies in reporting that might be indicators of non-compliance. Such discrepancies include changes to the balance sheet from year to year as well as issues flagged on the various reconciliation schedules (e.g., Schedule M-3) attached to an annual return. The IRS plans to issue “compliance letters” to nearly 500 partnerships beginning this winter, requesting an explanation for such identified discrepancies. Depending on the filer’s response, these partnerships may be added to the ongoing audit stream.
This bulletin should sound an alarm to all asset managers operating in complex tiered partnership structures and their service providers preparing the returns to diligently maintain workpapers and notes surrounding positions taken on the returns, in order to prepare for the potential that one of their filers gets flagged for audit. This is especially significant considering the newly imposed centralized partnership audit regime, where any adjustments applied during the course of exam that result in an imputed underpayment of tax are generally assessed at the partnership level. An exam at the partnership level could also have the cascading effect of indirectly bringing some of the partners under the microscope of the Service via the LPC’s interplay with the Global High-Wealth Audit Program and its enforcement efforts.
Given this backdrop, winter may be indeed coming for asset managers and other industries that operate in the form of large complex tiered partnership structures.
If you have questions concerning the IRS’s new compliance efforts or any other tax item, please reach out to any of our attorneys via email or call us today at 713-350-3529.
David A. Kianpour is an Associate Attorney at Zerbe, Miller, Fingeret, Frand & Jadav LLP. He has been practicing in the area of partnership taxation for over 8 years in the Big 4, with a focus on international tax issues for asset management clients. He also currently assists clients with general tax compliance and planning issues, as well as representation before the IRS in tax controversy matters. dkianpour@zmflaw.com.
