In a significant shift that will affect tax practices nationwide, the Internal Revenue Service has activated its new pass-through compliance unit within the Large Business and International Division (LB&I). This development marks a fundamental change in how pass-through entity audits will be conducted and managed, requiring tax practice leaders to adapt their strategies and client services.
The most notable change is the consolidation of pass-through examinations under LB&I's authority. Previously, these audits were divided between LB&I and the Small Business/Self-Employed Division based on entity size. Under the new structure, LB&I will initiate all pass-through examinations regardless of size, while SB/SE will continue examining pass-throughs only as part of related return examinations.
IRS Commissioner Danny Werfel explained the strategic rationale behind this reorganization, stating that it will enable the agency to "reverse our historically low audit rates for complex arrangements employed by certain high-wealth individuals and large entities." This statement signals a clear intention to increase scrutiny of sophisticated pass-through structures.
The new unit has already begun demonstrating its enhanced enforcement capabilities by launching examinations of 76 of the largest partnerships, targeting entities with average assets exceeding $10 billion. These initial audits encompass a broad spectrum of businesses, including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms.
To support this initiative, the IRS has implemented a geographic team structure for revenue agents, potentially changing how tax practitioners and their clients interact with examiners. Additionally, the IRS Chief Counsel's office has established a new associate office specifically focused on partnerships, S corporations, trusts, and estates, indicating a more specialized approach to complex pass-through issues.
For tax practice leaders, these changes necessitate a strategic response. Firms should consider reassessing their client portfolios, particularly focusing on those with complex pass-through structures that may attract increased attention under the new framework. Practice managers may need to adjust their risk assessment protocols and potentially develop specialized teams to handle the anticipated increase in complex examinations.
Client communication becomes particularly crucial in this environment. Practice leaders should prepare to guide clients through these changes, helping them understand the implications for their businesses and assisting them in preparing for potentially increased scrutiny. This may include reviewing and strengthening documentation practices and compliance procedures.
The establishment of this dedicated unit represents more than just an administrative change; it signals a long-term commitment to enhanced enforcement in the pass-through entity space. Practice leaders should view this as a strategic shift in IRS priorities and adjust their long-term planning accordingly.
As this initiative continues to develop, tax practices should maintain flexibility in their approach, ready to adapt as the IRS refines its methods and priorities. The success of tax practices in this new environment will largely depend on their ability to anticipate challenges and proactively address potential compliance issues before they attract regulatory attention.
For tax practitioners, this reorganization presents both challenges and opportunities. While it may increase the complexity of compliance work, it also offers firms the chance to demonstrate their value to clients through enhanced advisory services and strategic planning. Practice leaders who successfully navigate these changes will position their firms as essential partners in their clients' business success.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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