IRS sets up unit to focus on tax compliance at pass-throughs

The Internal Revenue Service said Wednesday it’s establishing a new work unit within its Large Business and International division as part of a push to bolster tax compliance at large partnerships and other pass-through entities.

The new unit will include people hired as part of an initiative the IRS announced last week to hire 3,700 agents as it plans to increase audits of large partnerships and corporations, as well as high-income people. IRS Commissioner Danny Werfel said this month the IRS would be using artificial intelligence and data analytics to help the agency spot patterns of noncompliance among large partnerships, such as hedge funds, real estate investment partnerships, publicly traded partnerships and big law firms (see story). The new work unit within the LB&I division will help with that initiative. The pass-through entities that will come under scrutiny from the work unit includes both partnerships and S corporations. 

“This is another part of our effort to ensure the IRS holds the nation’s wealthiest filers accountable to pay the full amount of what they owe,” said IRS Commissioner Danny Werfel in a statement. “We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns. This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come.”

“This is an important change we will be making, and we will be working in the months ahead to efficiently and effectively transition to this new group,” said LB&I Commissioner Holly Paz when she announced the new unit Wednesday during a speech before a Tax Executives Institute meeting in New York. “This effort will include working inside the IRS as well as working with external partners to ensure this is a smooth transition period for everyone involved.”

The IRS will be coordinating with the National Treasury Employees Union on the effort. The work group will formally “stand up” late next year, according to Paz, but work involving pass-through areas will continue to increase before that time. The group will later expand to include employees from both the LB&I and the IRS Small Business/Self-Employed division.