Accounting
The long, tortured debut of the IRS Centralized Partnership Audit Regime
It has been 10 years since the Bipartisan Budget Act introduced the Centralized Partnership Audit Regime. The program was intended to help the Internal Revenue Service audit partnerships more efficiently, but over the last decade, the IRS, taxpayers and practitioners have encountered numerous issues with CPAR, often resulting in administrative burden.
“CPAR impacts not only partnerships themselves, but also partners, who may be corporations or high-net-worth individuals,” said Colin Walsh, principal and practice leader of Top 10 Firm Baker Tilly’s tax advocacy and controversy services. “By its nature, CPAR is novel, widespread, misunderstood and controversial.”
“BBA and CPAR are both used to refer to the same thing,” according to Walsh. “The IRS calls it the BBA because that was the act that created it. Most practitioners call it CPAR.”
The legislation it refers to made various changes to the Internal Revenue Code that made it significantly easier for the IRS to audit a partnership, make changes to that partnership’s tax return and then make an assessment as a result of those changes. It was a direct response to the prior regime, which was called TEFRA, where the IRS had a very difficult time auditing partnerships. TEFRA was named after the Tax Equity and Fiscal Responsibility Act of 1982, but the partnership audit provisions changed with the Bipartisan Budget Act.
“The initial legislation was at the end of 2015, but it was prospective,” explained Walsh. “Even though it came into effect in 2015, the first income tax return for which these rules were required was the 2018 Form 1065. Congress decided that they would give a little bit of time to prepare and gear up and adjust operating agreements. But in 2018, when they filed, they would be subject to the new rules if they got audited.”
Then the 2018 returns, especially the more complicated ones that got selected for exam, were filed in the subsequent fall, so the 2018 returns selected for audit were filed in the fall of 2019, and selected for audit in 2020.
“When COVID hit, the IRS had a policy of bit selecting new returns for exam, so they decided that since everyone was suffering they would hold off on rolling out CPAR,” he continued. “So we, as tax controversy professionals, were geared up in 2020 to start these CPAR audits, but because of COVID, 2020 quickly turned into the spring and summer of 2023.”
There was a convergence of two factors, according to Walsh: “We had this legislative program that was sitting on the shelf for a few years, but in addition to the legislation, for the first time in decades, the IRS was given funding with which it could implement the program. The IRS was struggling through the pandemic and even before the pandemic for lack of resources. So in 2023 and 2024 the IRS built internally a partnership audit task force. They were hiring folks, developing technology and processes to go out and audit partnerships. Baker Tilly’s partnership clients were getting selected for audit under these new procedures, and we spent a good chunk of 2024 administering these exams and starting to see, finally, a decade after the BBA became law, actual exams under this regime.”
The Inflation Reduction Act provided $80 billion to be paid out over 10 years, and the partnership audit task force was one of the things that the IRS intended to spend the money on.
“But of course, what was $80 billion became $60 billion because some of the funding was clawed back, and that became $40 billion, and now we’ve hit a pause button. All of us who work in this space are very curious to see what impact the lack of funding is going to have on the audit of partnerships,” said Walsh. “We’re actively working with our clients on BBA/CPAR audits right now. This has been a decade in the making — we were on the precipice of really beginning this. The plane was just starting to take off, but now it’s back on the runway. And we don’t know when the plane is going to take off again or if it will take off at all.”
“Whenever anything is new, it’s bound to be a little bit of a bumpy road ahead,” he said. “It’s hard for Congress when they write a statute and it’s hard for Treasury when they issue regulations to contemplate the complexity of administering something like this. So this first year of the rollout of CPAR it has been a little bit bumpy in terms of rolling out the new rules. There are new forms, new Internal Revenue Manual provisions, and a centralized approval process for any changes that are made that agents have to coordinate with this other group. And there is some subjectivity as to how the law applies. So it’s a little bit more art than science at this point as we stumble our way through the first year, but I think both on the IRS end and on taxpayers end, we learned a lot.”
“For example, the first time we filled out a power of attorney under CPAR, it was rejected because it wasn’t filled out correctly,” said Walsh. “We had to change the wording to align with the way the IRS wants it. But now we won’t have that problem anymore because we’ve done it.”
The real question now is about how the law will be enforced, according to Walsh.
“It doesn’t really matter if these rules exist if no one is there to conduct the audits,” he said. “The story is now more of financing than it is for the law, because the law has now existed for a decade. We just haven’t seen the administration of that law.”
The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.
The
- ISA 620, Using the Work of an Auditor’s Expert;
- ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
- ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
- ISRS 4400 (Revised), Agreed-upon Procedures Engagements.
The IAASB is asking for comments via a digital response template that can be found on the
In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.
President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an
The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.
Trump has
Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.
Food prices could rise by 2.6% in the short run due to tariffs, according to an
The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.
Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist
Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.
“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.
One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.
“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.
Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.
“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.
However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.
“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.
As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.
“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.
While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.
“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”
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