IRS to Launch Fishing Expeditions for Pass-Through Entities

By Ken Berry
 
The IRS doesn't always try to catch the biggest fish in the pond. Case in point: It has announced it will devote more resources to auditing various pass-through entities instead of focusing on the traditional corporate targets.
 
Faris Fink, head of the IRS Small Business and Self-Employed Division, says auditing pass-through entities will become a top priority next year and thereafter. Speaking at the AICPA's National Tax Conference in Washington, DC, on November 7, Fink promised the IRS will spend more time and money training its agents to go after what it previously considered to be small-fry.
 
"The Service has for a long time focused its energy on corporations," said Fink. "Frankly, we're a little bit behind the curve in getting around to developing a partnership strategy."
 
Pass-through entities  including partnerships, S-corporations, and some limited liability companies (LLCs)  don't pay income taxes directly to the government. As the name implies, items of income are passed through to individual partners or shareholders, who then report the allocable portion of the income on their personal tax returns. Currently, almost 95 percent of all business operations in the United States are pass-through entities.
 
IRS agents often have difficulty unraveling the layers of these structures. Fink alluded to partnerships with as many as 82,000 partners and entities comprised of more than 180 tiers. "Frankly, our training was not geared for dealing with those types of large, complex partnerships," he said. "Historically, we would think of a partnership of having, say, ten partners" with a limited number of tiers.
 
According to Fink, the IRS also suspects that some of the larger partnerships are designed to shield transactions from the prying eyes of the IRS. "We as an organization have recognized that this is something that we've got to be paying attention to, not just this year, but going forward," he said. But Fink wasn't willing to paint all partnerships with broad strokes. "Not every flow-through entity is formed as an intentional act to avoid the payment of taxes," he acknowledged.
 
To better address partnership issues, the IRS will be stepping up its efforts to train field examiners and revenue agents. Fink had a clear message for tax return preparers in his speech. "It's going to be challenging for you, because you're going to be interacting with some of those folks," he remarked.
 
Fink is no stranger to the spotlight. Earlier this year, he was singled out for appearing in as Mr. Spock in a Star Trek parody produced by the IRS for an internal training conference. The IRS has since apologized for using taxpayer money for frivolous pursuits.
 
Related articles:
 

You may like these other stories...

Truckers and other owners of heavy highway vehicles take note: Your next federal highway use tax return is due on September 2.The September 2 due date, which was pushed back two days because the normal August 31 deadline...
The head of the IRS has a message for taxpayers and tax preparers who have endured long wait times while on the phone with the tax agency: Call your member of Congress.During his keynote speech at the 69th Annual Meeting of...
Regulators struggle with conflicts in credit ratings and auditsThe Public Company Accounting Oversight Board (PCAOB), which was created by the Sarbanes-Oxley Act in 2002, released its third annual report on audits of...

Already a member? log in here.

Upcoming CPE Webinars

Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.