IRS Not Required to Link Partners in Partnership Audits

Posted by Lee Meyercord and Mary McNulty               In recently released legal advice (available here) the IRS addressed whether it is legally required, when beginning a partnership-level audit, to link partners on the computer system that it uses to comply with certain partnership audit requirements. The Partnership Control System (PCS) is a computer database used by the IRS to mechanically generate the notices required by the unified partnership audit and litigation procedures and to flow through any adjustments made in the partnership audit to the partners. Because PCS is a tool that the IRS uses in the course of partnership audits and it is not required by statute, the legal advice concludes that the IRS has complete discretion regarding whether to link partners on PCS.  The IRS may decide to link some but not all partners on PCS, and it may de-link a partner if it decides not to pass through partnership adjustments to that partner.  The legal advice concludes that the IRS is not required to notify partners regarding whether they were linked on PCS. In addition, the legal advice states that the IRS is not required to notify a partner if it decides not to make adjustments to the partnership return or it decides not to pass through partnership-level adjustments to that particular partner. The IRS may assess some partners, while not assessing others, and there is no statutory requirement to notify partners that they will not be assessed.In a report by the Government Accountability Office (GAO) released last year and discussed in a prior post, the GAO found that linking partners on PCS is a significant drain on IRS resources.  The legal advice is likely intended to improve the efficiency of partnership audits by allowing the IRS to focus on those partners with a significant interest in the partnership and to ignore those partners whose interest in the partnership is insignificant. 
If you have any questions about this legal advice or partnership audits, please contact one of us or any of the other Tax lawyers at Thompson & Knight.