The US Internal Revenue Service (IRS) announced the new pass-through field operations unit announced last fall that has officially started work in its Large Business and International (LB&I) division to more efficiently conduct audits of pass-through entities.

The creation of a new unit specifically devoted to ensuring compliance of pass-throughs of every size and form—including partnerships, S-corporations and trusts—reflects the IRS’s broader efforts to focus more attention and resources on an area that has historically been under-scrutinised.

Previously, pass-through exams were divided between LB&I and the Small Business/Self-Employed (SB/SE) division based on the size of the entity. Going forward, revenue agents in pass-through field operations will be assembled into geographically based teams that are responsible for primary exams of pass-through entity returns. LB&I will be responsible for starting pass-through exams, regardless of entity size. SB/SE will continue to examine pass-through entities as part of a related exam of a tax return.

Consolidating the case-working expertise and removing the entity-size barrier helps the IRS achieve its goal of increased audit rates in this complex area, streamlines workflows and provides a more consistent experience for taxpayers.

A pass-through is a business entity in which the profits “pass through” to the owner(s) of that business and are taxed at the individual tax rate. They are frequently used by higher-income groups and can be complex tax arrangements.

Over the last year, LB&I has made strides in building the foundation of this specialised group with internal and external hiring efforts to ensure it’s well-staffed with a blend of expertise from current IRS employees and new hires. In addition to staffing, the dedicated stand-up team also focused on collaboration between LB&I and SB/SE to review and enhance support frameworks, training programs and other internal processes.

The IRS has also embarked on other important changes to help dedicate resources and support to this complex compliance space.

• The IRS launched examinations of 76 of the largest partnerships with average assets over USD 10 billion that includes hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and many other industries. These audits can take years depending on the size and complexity of the partnerships.
• IRS Chief Counsel announced the creation of a new associate office that will focus exclusively on partnerships, S-corporations, trusts and estates. This office will be drawn from the current Passthroughs and Special Industries (PSI) Office.

The stand-up of pass-through field operations meets one of the priorities of the Strategic Operating Plan under Objective Three: Fairness in Enforcement. It is also a significant part of the overall expanded enforcement efforts that focus on high-income and high-wealth individuals, partnerships and large corporations that have seen sharp drops in audit rates during the past decade.