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.