The IRS is using artificial intelligence to assist it in selecting 75 large partnerships for examination. This is the result of collaboration between experts in data science and tax enforcement. These experts have been working together to apply machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. The examinations, which are to commence by the end of September, will represent a variety of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. The IRS will also start mailing compliance letters to 500 additional large partnerships that have ongoing balance sheet discrepancies.
These efforts are part of the IRS’s ongoing focus on large partnerships and other wealthy taxpayers and are being fueled by Inflation Reduction Act funding. On average, the partnerships to be examined each have more than $10 billion in assets. In addition, a new Large Business and International Division group dedicated to passthrough entities will support the increased enforcement and audit coverage of large partnerships and complex arrangements involving passthroughs.
These examinations will take place under the backdrop of the centralized audit regime created by the Bipartisan Budget Act of 2015 (BBA). The BBA audit provisions are largely untested, and many of the provisions are unclear. Partnerships would be well advised to take steps now to prepare themselves for potential examination, even relatively simple steps, such as ensuring that they know the identity of their partnership representatives and have the proper mailing addresses on file with the IRS.