The Internal Revenue Service (IRS) recently initiated a far-reaching enforcement effort specifically aimed at partnerships. This move is projected to significantly impact big corporations and law firms dealing with complex pass-through business structures. In a bid to reinforce its Large Business & International (LB&I) division, the IRS is assembling a special group focused exclusively on large and complex pass-through entities like limited liability companies (LLCs) and S Corporations. The legal implications of this development are substantial.
According to IRS Commissioner Daniel Werfel’s recent statement, the IRS is focusing on areas where it perceives widespread non-compliance among high-earning tax filers, particularly in light of consistent IRS budget cuts over the past decade. As the Commissioner explicitly stated, “pass-throughs are high on our list of concerns.”
With the IRS honing in on pass-through entities, legal professionals working with such entities should anticipate intensified IRS scrutiny. The potential for increased audit activity and potential disputes highlights the need for robust tax compliance procedures among law firms and their clients associated with such entities.
It’s apparent that the IRS’s new strategy targets perceived tax loopholes that wealthy individuals and entities exploit. The enforcement effort signals the IRS’s intention to heighten regulatory enforcement against wealthy taxpayers and large businesses to ensure fair and proper tax compliance. It, therefore, remains to be seen how this historic IRS enforcement effort will reflect on partnerships and complex pass-through entities.