IRS to Increase Scrutiny of Partnerships Passthrough Entities Beginning in 2013

By Lydia Beyoud

Partnerships and passthrough entities will receive much more attention by the IRS’s Small Business/Self-Employed Division beginning in 2013, SB/SE Commissioner Faris Fink said Nov. 7.

SB/SE is developing an enterprise-wide strategy, in conjunction with the Large Business and International Division, “to address the inherent risks that exist with these sorts of business structures,” Fink said at the Fall Tax Division Meeting of the American Institute for Certified Public Accountants.

IRS will lay the foundation next year for building the strategy through developmental stages, after which audit activity will increase in 2014, Fink said. That will mean a reduction in other types of returns that SB/SE handles, he added.

Over the first six to nine months of next year, IRS will pilot methods to better identify its workload by looking at the right kind of partnership entities and returns, Fink said. IRS will also focus on issue identification, such as looking at loss limitations or distributions, and make sure those issues feed into its workload identification strategy.

Fink also said IRS would work to provide additional training for its revenue agents, as the increased focus on partnerships will be done by field revenue agents.

Fink said he wanted to emphasize the point that the expanded focus on partnerships and passthrough entities does not mean IRS believes all partnerships are formed with the intention of avoiding payment of taxes. Rather, he said, IRS recognizes that more businesses are migrating to partnerships and away from traditional corporate structures.

This shift in priorities “makes good business sense,” Fink said, as IRS looks ahead to the types of business entities that are taking shape. The IRS will need feedback from practitioners, “as it does whenever it engages in an effort to shift direction to look at something more closely,” he said.

Modifying Voluntary Classification Settlement Program

Fink advised practitioners to “stay tuned” for changes to its Voluntary Classification Settlement Program that would allow previously-disqualified individuals and businesses to enter the program.

IRS is particularly looking to redefine the program for taxpayers, such as those that had been under a continuous audit or who were required to file all forms as 1099-type forms. Modifications to the program may allow taxpayers in these situations to become eligible, Fink said.

Correspondence Exams Will Also See Changes

IRS is in the early stages of attempting to make changes to correspondence exams, Fink said. “[Correspondence] exams have always been a concern in the practitioner community,” he said.

The IRS has established a team from different divisions that plans to create six new filters for the exams “to better refine the cases we’re looking at,” Fink said. IRS will also seek practitioner input later in the process, he said.

Correspondence exams may be one area where IRS can implement its virtual service delivery program, Fink said. The program consists of kiosks in unstaffed, volunteer, and other types of tax preparation locations where taxpayers can teleconference directly with a revenue agent. The details of being able to implement that technology, such as how to upload documents, or ensure privacy during the exam, still need to be worked out, Fink said.

“I sincerely hope that it is successful,” he said. “I can see the benefit that where, even if you’re not in the room, at least if you’re seeing them … you’re having an exchange. The benefits have got to be substantially greater than passing things back and forth through the mail.”

Modifying Offers in Compromise Agreements

The IRS will focus more on how it conducts its financial analysis in calculating offers in compromise agreements, Fink said. IRS will now allow for delinquent state and local taxes as a part of the financial analysis during the offer process, as well as allowing for guaranteed student loans in certain situations, he said.

IRS is also starting to allow additional items, including minimum credit card payments, bank fees, and bank charges, in its analysis, Fink said.

It had previously modified the “reasonable collection potential” calculations to afford greater flexibility and faster resolution to financially distressed taxpayers, Fink said.

These steps constitute “the relaxing of what were some pretty stringent requirements,” which is allowing offers in compromise to be a more “viable tool,” Fink said.

One Year for NRP Corporate Small Business Audits

IRS will no longer be using three-year cycles for its corporate national research project (NRP) audits for small businesses, Fink said.

Those audits will now be limited to one year and generally to corporations with less than $250,000 in assets, he said. This change marks “a more effective use of resources” for IRS, Fink said.

NRP audits help IRS determine key indicators on what it should be doing for issue identification and return identification for audits and compliance, Fink said. The current employment tax NRP project is already under way, with a selected base of 2,000 returns for the 2008 to 2010 tax years, that have all been issued to the field and are in various stages of examination, Fink said. All of the cases will be opened by the end of the year. The service’s primary focus for these audits is on Form 941, Employer’s Quarterly Federal Tax Return, Fink said.