GAO: The IRS Needs to Ramp Up Audits of Large Partnerships

Government Accountability Office, With Growing Number of Partnerships, IRS Needs to Improve Audit Efficiency (GAO-14-732):

The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.

The Internal Revenue Service (IRS) audits few large partnerships. Most audits resulted in no change to the partnership’s return and the aggregate change was small. Although internal control standards call for information about effective resource use, IRS has not defined what constitutes a large partnership and does not have codes to track these audits. According to IRS auditors, the audit results may be due to challenges such as finding the sources of income within multiple tiers while meeting the administrative tasks required by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) within specified time frames. For example, IRS auditors said that it can sometimes take months to identify the partner that represents the partnership in the audit, reducing time available to conduct the audit. TEFRA does not require large partnerships to identify this partner on tax returns. Also under TEFRA, unless the partnership elects to be taxed at the entity level (which few do), IRS must pass audit adjustments through to the ultimate partners. IRS officials stated that the process of determining each partner’s share of the adjustment is paper and labor intensive. When hundreds of partners’ returns have to be adjusted, the costs involved limit the number of audits IRS can conduct. Adjusting the partnership return instead of the partners’ returns would reduce these costs but, without legislative action, IRS’s ability to do so is limited. 

• Accounting Today, IRS Prodded to Improve Efficiency of Audits of Large Partnerships
• Bloomberg, Investment Funds’ Complexity Stymies IRS Audits, GAO Says
• The Hill, Report: IRS Can't Effectively Audit Large Firms
• USA Today, Report: IRS Audits Few Large Partnerships