Accounting
IRS targets large partnerships for increased audits
The Internal Revenue Service is ramping up its scrutiny of large partnerships, leveraging increased funding under the Inflation Reduction Act of 2022.
Last year, the IRS
“There is a special initiative with the large partnership compliance program, and for that the IRS announced they have selected 76 entities, and they’re doing large partnership audits,” said Rochelle Hodes, principal in the Washington national tax office at Crowe LLP, a Top 25 Firm based in Chicago. “But that’s a special category. What we’ve seen in partnership audits is generally an increase.”
She recently shared her insights with Accounting Today on the main takeaways for taxpayers involved in partnerships to ensure compliance and successfully navigate partnership audits amid increased scrutiny. She also recently discussed this topic in an Insight article for Crowe that can be
Andrew Harrer/Bloomberg
“I expect that we’ll start to see the results of the IRS having better trained agents and better behind-the-scenes issue selection,” she added. “I expect we’re going to start seeing that in the examinations as well.”
The IRS has been training more people to do these types of complex examinations and audits thanks to the Inflation Reduction Act funding. “They were working with a very skinny staff before the IRA money allowed them to hire, so they were basically operating, in some respects, with one hand behind their back,” said Hodes. “Because partnerships are sophisticated and because they have the various operating divisions in LB&I, they were taking their auditors who were more experienced, who basically were corporate. They knew issues that corporations had, and so you’re taking these people who had been doing exams in a certain way and focusing on certain issues, and they moved them over, and they didn’t provide very much training.”
The IRS had also been auditing partnerships in its Small Business/Self-Employed Division. “Then you have the small business auditors who were focusing on a lot of their bread and butter issues, which if the partnership you selected was an operating partnership that operated a business that made sense,” said Hodes. “Issues like employment, tax and certain accounting method things, those would be normal for them, but I think that they just completely missed the mark because they were not trained either on partnership issues. Now we have a change.”
A new Pass-through Entities Practice Area group in LBI led by Cliff Scherwinski is combining the SB/SE and the LBI resources for audition and training those personnel.
“I think the result is going to be potentially a better trained examination workforce for partnerships, more agents focused on partnerships, and more consistency in what the taxpayer experiences when they have an examiner doing the partnership exam, and I think that’s a good thing,” said Hodes.
The new approach overlaps with the implementation of a centralized partnership audit regime at the IRS. The Bipartisan Budget Act of 2015 allowed the IRS to set up a
“The other thing that we saw in the beginning of this whole thing with BBA coming in, the BBA procedures for conducting an examination are different in a number of ways, and my experience was most of the agents had no idea what the BBA procedures were, and I think they were given very few tools to help them with that,” said Hodes. “There also was not a lot of process, so there wasn’t a lot of consistency. I think we’ve started to see much more consistency. We’ve started to see teams training. Being an auditor, being an examiner, is a skill set in itself, notwithstanding the subject matter that you do it in or the division that you’re in. We’re seeing some of this knowledge transfer. We’re seeing some consistency, and I think the IRS will proceed further with that. Truthfully, that’s a good thing for the taxpayer as well. At least if you’ve got to be audited, you want to be audited by people who know what they’re talking about, who know what the procedures are supposed to be, because for a lot of taxpayers, this will be their first exam for many partnerships, and it will be their first exams under the BBA procedures. So it’d be very nice if they could rely on the IRS knowing what they’re doing. And I think we’re going to see a smoother process. While it’s not wonderful to be audited, at least if the process is smoother, and you have knowledgeable folks who are performing the exam, it can take that little bit of pain out of the examination.”
She is seeing more consistency under the BBA regime.
“One of the things that is different is the idea of an examination is consistent throughout,” said Hodes. “You get selected, the IRS goes and asks you questions with information document requests, IDRs. And then the agent might go to specialists or not, but will identify issues that they’re concerned about. You talk about those issues, then the IRS agent will let you know what they think their issues are going to be. The way things worked in a corporate exam in LB&I, it was a notice of proposed adjustment. But before that, there was an informal process where the agent would give a draft and sort of write up their issues to the taxpayer, in order to get the taxpayer’s response and work through to see if there really are any issues, to get an idea of this potential agreement and to try to really fine-tune before they got to the notice of proposed adjustment, BBA has statutorily got this notice of proposed partnership adjustment, so that’s a similar process. But then LB&I put it into their processes. They formalized that preliminary or draft as a step in the BBA process, and that step starts the clock to request an appeal on the substantive issues, formalizing that sort of draft or preliminary NOPPA, but the names are different on these things, and the notice of proposed partnership adjustment also comes with a draft, as does the preliminary draft of the imputed underpayment computation as well. There are the substantive issues. And then how, under the uniqueness of BBA, they compute whatever tax is supposed to be due, which is the imputed underpayment. So those are other differences. And then, once the notice of proposed partnership adjustment is issued, that then starts a 270-day clock for the taxpayer to request modification.”
She noted that if a taxpayer requests a modification and it’s denied, the taxpayer will have another opportunity to go to the IRS Appeals office about the denial of the modification. “It’s not a second fight for issues that you already went into Appeals for, but it’s that two opportunities to go to Appeals that are unique,” said Hodes.
There are some similarities as well as differences. “After the modification process is over, then you get whatever now your adjustments and imputed underpayment is post modification,” said Hodes. “You’ve got this final partnership adjustment, which looks a little bit in the TEFRA [Tax Equity and Fiscal Responsibility Act of 1982] space like the final FPA. You’ve got the final notice, and that has an equivalent in the corporate space or the individual space with the notice of deficiency. And so those are your ticket to go to court. Within 90 days, you have to ask to go to court. That’s a similarity. There’s this final determination by the IRS, and once they give it to you, you get 90 days to say if you go to court. Another difference in BBA is you’ve got 45 days to make an election of whether or not you want to push out the adjustments, if you want to make that pushout election, and that 45 days is a strict date, and it runs concurrent with that 90 days. So in the first 45 days after you get an FPA, you’ve got to decide, am I going to push out, or is it possible I might want to push out. Then, if it is possible, you’ve got to make the election. And then within that 90-day period, which 45 days is running as well. So you’ve got these two time frames running at the same time. You then decide whether or not you want to go to court.”
She sees that as another major difference. “After you get your final partnership adjustment, you’ve got two decisions: Do I push out? Do I go to court? There’s a bunch of other stuff, but those are the big changes in process.”
However, the November election is likely to have an impact on partnership audits. “Depending who wins in Congress and the White House and whether and how the negotiations on TCJA expiring provisions go, we could see some form of partnership legislation,” said Hodes.
She pointed to several possible wrinkles. “Carried interest has been a hot issue for a long time,” said Hodes. “Senator [Ron] Wyden had a whole partnership reform bill at one point that could come back to life, and you have the administration’s Green Book that has a bunch of partnership updates, so there’s a lot of potential for continued change. And then you have the IRS SECA [Self-Employment Contributions Act] issue with LPs. That’s a super hot issue right now. A lot going on. You’ve got the basis-shifting proposed regs that they put out. That’s sort of bubbling up over there. You have IRS talking about being concerned with disguised sales and wanting to do new guidance on that. On the guidance front too, there’s potential for more change in the partnership space. And then the TCJA expiring provisions are mostly individual provisions, but 199(A) is supposed to expire at the end of 2025. Huge in the pass-through space. [Section] 461(l), which limits business losses that can be claimed by noncorporate taxpayers is a huge passthrough issue. 461(l) is supposed to expire, I think, at the end of ’28. Will that be extended as part of raising revenue in order to get to a deal in TCJA? Who knows? There are all kinds of passthrough-specific things that are also swirling around. If I’m in a partnership or passthrough or I am someone who is heavily involved in passthrough entities or has significant investments in passthrough entities, I’m watching all of this stuff, and there’s so much change.”
Her firm, Crowe, has a campaign called “Embrace Volatility.” “Certainly for passthrough entities, that is the way they should think about stuff,” said Hodes.
She also sees implications in the international space. “A lot of the international rules are going to be dealing with pass-through non-U.S. entities,” said Hodes. “How are global MNCs or MNEs [multinational companies or enterprises] going to be dealing with components of their structure that are pass-through entities? The rules are, in some cases, very uncertain, and in other cases very unfavorable. There’s a lot affecting pass-through entities in the international space. One of the biggest tax issues right now is the taxation of passthrough entities. I think that’s just huge right now, because everything’s so up in the air, and the IRS is really starting to focus.”
The “big beautiful bill” touted by President Trump is getting closer, though the timeline remains imprecise.
“There’s been some public reporting on tougher questions of spending cuts, but the difference between the tax bill this year and the Tax Cuts and Jobs Act in 2017 is that the inclusion of a lot of spending cuts in the same bill makes it more challenging this year. From the bill itself several categories are apparent,” said Stephen Eckert, a partner in the National Tax Office of Top 25 Firm Plante Moran. “There’s the extension of the TCJA extension, campaign promises, and a catch-all category. In some ways we would expect an extension of the vast majority of TCJA provisions, plus the campaign promises as well as potentially all the other things that get thrown in that we didn’t expect.”
“For example, S.711, the Transportation Freedom Act, sponsored by [Sen. Bernie Moreno, R-Ohio], which would give a 200% deduction for wages paid to auto workers. There is a broader category of things that could be coming to support certain industries,” he continued.
Bloomberg/Bloomberg via Getty Images
One looming question regarding campaign promises is the potential modification of the Inflation Reduction Act and green energy incentives, Ecker noted: “There has been opposition to certain changes there from Republicans — we’re watching to see what happens to the fate of energy efficient credits and incentives and to what extent they are modified under the bill.”
The House and the Senate are working in parallel, waiting for legislative text, he observed. “The non-tax portions of the bill will be worked on earlier, but until we get the actual text from the House Ways and Means Committee, there will be questions. For example, there are multiple versions of some of the Trump proposals, such as the proposal to exclude tips and Social Security benefits from income. Each one is a little bit different. We expect changes but it’s unclear what the changes will be.”
Principles or tactics?
For Eckert, the real questions are about where the red lines are for certain members. For example, there have been statements by some House members that they won’t vote for the bill if it includes a cap on state and local tax deductions.
But are those actual red lines, or negotiating positions that will be softened?
“At this point, businesses would just like some degree of certainty going forward,” he said. “Until then, it’s hard to engage in longer term planning. Hopefully, the bill will advance relatively soon so businesses will know what will be the law for the next couple of years and have a chance to plan for the future.”
The House and Senate are both actively working on their versions, and they are constantly interacting with each other, according to Miklos Ringbauer, founder of MiklosCPA in Southern California. “So instead of having A and B and then trying to figure out what they can create out of it, they are now jointly working on it, so it has a greater chance of passing across the board,” he explained.
However, there’s a bit of a gap in the size of the budget cuts in each bill, with the Senate version pegged at less of a cut than the House. And some want to double the SALT limitation, while some would prefer to see it go away altogether.
“Likewise,the estate tax exemption,” he continued. “There are some that would like to see the entire estate qualify as exempt from tax. Those are some of the ideas floating around, but until it’s voted on by both chambers and the president signs it, there’s no law. Everything can change until the very last minute.”
Ringbauer noted that the TCJA required technical corrections and extensive guidance when it was passed in 2017, and he anticipates the same with this year’s bill: “There’s a very short overall window because the 2017 laws are expiring at the end of this year. Between May and December we have just a few months.”
“It looks like everyone is on board with expanding the availability of the Child Tax Credit on the individual side. It helped a lot of families at that time. It helped a number of families to get out of poverty,” he noted.
The reenactment of 100% bonus depreciation and the opportunity to fully expense R&D will be boons to business if they are, as expected, part of the legislation.
“It’s an exciting year for tax accountants; we are seeing a huge transformation of tax laws all over again,” Ringbauer said. “What could happen is, they simply reenact every part of the 2017 tax law legislation, or they could figure out what really worked and what didn’t work, and start adjusting some things and letting other ones expire.”
The International Ethics Standards Board for Accountants staff posted a
The standards offer a principles-based framework and a global ethical benchmark to guide accountants in public practice and in business when they’re doing tax planning.
The Q&A publication highlights, illustrates and explains various aspects of the standards to help firms, jurisdictional standard-setters and accounting organizations adopt and implement the standards, and individual accountants apply them. The publication can also help tax authorities, the corporate governance community, investors, business preparers, educational bodies or institutions, and other stakeholders understand the standards.
The Tax Planning and Related Services standards take effect July 1, 2025.
Tech-forward CPA firms–including those listed in this year’s
One of the most commonly mentioned areas were firm practice management systems.
Some, like California-based Navolio and Tallman, wanted better reporting options than were currently on offer from their practice management systems. New Jersey-based Wilken Gutenplan, meanwhile, said they needed practice management software with better billing and reporting features. And others, like top 25 firm Citrin Cooperman, wanted better solutions for internal administrative tasks. Meanwhile, top 100 firm Prager Metis, wanted better workflow and integrations.
Andrii Yalanskyi – stock.adobe.c
“[We plan to] focus on improving inward facing practice management workflows that seamlessly provide connectivity between different vendor applications. Effectively automation from client intake to delivering the service,” said chief information officer Gurjit Singh.
However, such upgrades are not always easy, and in fact can present a major challenge for firms such as Iowa-based Community CPA and Associates.
“Our biggest technology challenge continues to be managing technical debt and navigating the limitations of our legacy systems—particularly the lack of interoperability and scalability in key platforms like our practice management system (PMS). This system handles many interconnected functions—client tracking, engagement and project management, time entry, billing, and collections—but its tightly integrated design makes it difficult to enhance any one area without impacting others. While we’ve made progress with some integrations and automations, we’re still working to develop and migrate these functions to more robust modern platforms that allow for greater scalability,” said CEO Ying Sa.
Firms also reported a need to update and improve their technology infrastructure. Top 25 firm Armanino, for instance, was expanding its cloud footprint even further, with the firm wanting to move its remaining on-premise dependencies into native cloud solutions. Illinois-based Mowery and Schoenfeld, similarly, pointed to their server infrastructure as an area that needs updating.
For others, though, the question of infrastructure was less about hardware and more about software. In particular, while firms have already made upgrades and improvements to their tech stack, getting these programs to talk to each other seems to be a consistent challenge across firms, one that firms such top 50 firm LBMC said they were eager to address in both their client-facing and back-office technology solutions.
“Our firm’s biggest technology challenge is the ongoing effort to integrate various service-specific applications so they can work seamlessly together. This integration is crucial for enhancing collaboration and efficiency across different service lines,” said CEO Jim Meade.
But while these were the more common answers, there were many other areas that firms said could stand some improvement. Some, such as the Florida-based Network Firm, were looking to upgrade core service solutions like audit, tax or data analytics software. Others named process efficiency as a priority, such as top 25 firm Cherry Bekaert who named automation readiness/standardization for certain practices as an area due for an upgrade, or top 50 firm UHY who said they were working to streamline the engagement life cycle.
And of course there were those, such as top 25 firm Eisner Amper, that wanted to boost their AI capacities.
“Our focus for technology capability additions are in Generative AI where it can help us work smarter and faster—across both client-facing services and internal operations,” said chief technology officer Sanjay Desai.
AI, automation and infrastructure
These pain points have served to inform these firms’ plans for technology investments over the next year. While firms, just like before, provided a wide variety of plans and priorities, most seemed focused on improved efficiency and insights through automation and AI.
However, when it came to AI tools at least, most declined to provide specifics beyond their overall intentions to invest in them. Though, they did say they were hoping to use these solutions to speed up workflows in client-facing service areas like tax or audit, or to acquire tools that would let them create or modify their own AIs.
More expansive visions came when discussing the kinds of hardware purchases that would support these aforementioned AI tools. California-based Navolio and Tallman, for example, elaborated on its plans to purchase new laptops specifically optimized for AI applications.
“We’re planning to invest in a new generation of laptops that come with Copilot-enabled Neural Processing Units (NPUs). These laptops are designed to accelerate AI-powered tasks, and we see them as an investment that keeps our firm aligned with the future of the tech industry. The laptops will have improved internal specs for multitasking and include touchscreen functionality to make day-to-day usage more intuitive,” said IT partner Stephanie Ringrose. Other firms also made mention of new laptops optimized for AI, including Armanino, which added that it is also considering pairing them with hardwire and storage for internal AI production.
Beyond hardware, firms like Community CPA and Associates also said they were planning investments in their software infrastructure as well.
“We plan to begin transitioning to a new ERP and CRM platform as well as explore agentic AI tools for saving time in our accounting services workflows for our clients. We also intend to purchase replacement hardware for routine replacement of equipment that has reached the end of their lifecycle,” said Sa. Cherry Bekaert also said they were looking into new ERPs.
Other planned investments include virtual servers and desktops, API access for SaaS applications, resource scheduling and pricing solutions, data management and governance tools, cybersecurity solutions, and internal communications software.
However, some firms, such as the Network Firm, are not planning to purchase new solutions but to make them in-house, and more are planning to buy some and make others, such as Cherry Bekaert, who said they were building a custom intelligent automation platform. Assurance partner Jonathan Kraftchick said the firm is looking at many different avenues to align their technology investments with business objectives.
“As our portfolio broadens, it introduces new layers of complexity to our operations, requiring cutting-edge systems that deliver actionable insights, enhance decision-making, and streamline internal processes. This challenge propels us to implement diverse technology solutions, meticulously tailored to meet the evolving demands of our expanding portfolio and ensure the seamless integration of new acquisitions,” he said.
Major tax legislation set to move on Capitol Hill
Stocks making the biggest moves after hours: AFRM, COIN, PINS
IESBA offers Q&A on tax planning ethical standards
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Finance6 days agoWarren Buffett to ask board to make Greg Abel CEO of Berkshire Hathaway at year-end
-
Finance6 days agoBerkshire meeting ‘bazaar’ features Buffett Squishmallows, 60th anniversary book and giant claw machine
-
Personal Finance1 week agoMillions of older workers lost jobs during Covid. Prospects have improved
-
Economics1 week agoWhy does America have birthright citizenship?
-
Personal Finance1 week agoWhy Roth conversions are popular when the stock market dips
-
Economics1 week agoHow Donald Trump could rescue John Roberts
-
Economics1 week agoJobs report Friday to provide important clues on where the economy is heading
-
Economics1 week agoHow one Ivy League university avoided the president’s wrath