As we previously reported, the IRS issued its long-awaited Strategic Operating Plan this past April for implementing the billions of dollars in additional funding provided by the Inflation Reduction Act (IRA). The Strategic Operating Plan's centerpiece was a new enforcement strategy, the intended target of which was explicit: large corporations, large partnerships, and high-net-worth individuals. To increase audit rates for these groups, the Strategic Operating Plan provides that the IRS "will develop a centralized, integrated approach to assess risk to inform the selection of cases and appropriate treatments," which "will use risk analytics to prioritize and assign cases." If all goes to plan, taxpayers will be selected for audit by a "centralized compliance planning function using new analytics systems and refined risk-based case selection and routing" by the IRS's fiscal year 2026 (October 1, 2025, through September 30, 2026).
This past month, the IRS issued several announcements taking steps in the direction outlined in the Strategic Operating Plan, particularly with respect to IRS efforts to audit large partnerships. First, on September 8, 2023, the IRS detailed some of its plans to increase scrutiny of large partnerships and high wealth individuals using artificial intelligence "that will help the IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools." The announcement also said the IRS was expanding its Large Partnership Compliance program and promised to open audits by the end of September of 75 of the largest partnerships in the U.S., which "represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries."
Second, on September 15, 2023, the IRS announced that it was adding more than 3,700 positions nationwide to help with the expanded enforcement of complex partnerships and large corporations. These positions are for "higher-graded Revenue Agents" who will focus on taxpayer audits.
Third, on September 20, 2023, the IRS announced plans to create a new unit within the Large Business & International (LB&I) operating division with a special focus on large or complex pass-through entities. The goal of the new unit, according to Commissioner Werfel, is to "disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying taxes they owe."
With greater emphasis on enforcement comes greater need for effective dispute resolution programs within the IRS. In that vein, on September 15, 2023, the IRS requested comments on how to improve and expand tax certainty and issue resolution options. Specifically included in the request for comments was whether partnerships should be eligible to participate in the Compliance Assurance Process (CAP) in which taxpayers and the IRS work together to resolve any issues prior to filing the tax return. In addition, the IRS requested comments on how to "improve tax certainty and issue resolution at the entity level through to the ultimate taxpayer of pass-through entities." The IRS also requested comments on existing programs, such as the Pre-Filing Agreement (PFA) program and the Industry Issue Resolution (IIR) program.
The IRS's request for comments on issue resolution programs follows similar announcements earlier this year. On May 11, 2023, the IRS Independent Office of Appeals requested public input on how best to improve access to Appeals, whether by telephone, video, or in-person conferences. More broadly, on July 27, 2023, the IRS requested comments on how to improve certain post-filing alternative dispute resolution programs currently offered to taxpayers, such as Fast Track Settlement and the Rapid Appeals Process.
These announcements show that the IRS is undergoing considerable self-evaluation of its enforcement programs as it starts to implement the goals reflected in the Strategic Operating Plan. Taxpayers and practitioners should expect more activity in this area in the near future.
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