Report Finds IRS Needs Additional Improvements to Measure Partnership Audit Results

Posted by Mary McNulty and Lee Meyercord                In a recently released report (available here), the Treasury Inspector General for Tax Administration (TIGTA) evaluated the IRS’s progress in identifying and addressing partnership noncompliance. The TIGTA report concludes that the IRS cannot currently evaluate the productivity of partnership audits because the IRS does not know how much additional tax is ultimately assessed to the taxable partners as a result of partnership audit adjustments, and it has been more than 20 years since the IRS conducted a comprehensive compliance study on partnerships.TIGTA made the following recommendations to the IRS to improve its ability to measure the results of partnership audits:Develop a strategy to measure the success and productivity of partnership audits.Develop a computer system that can determine the amount of taxes assessed as a result of partnership audits. Currently, the IRS can only track partnership audit adjustments and not the tax assessed from the partners as a result of these adjustments.Develop a system that adequately captures the audits closed by the Campus TEFRA Function (CTF). CTF makes the partner-level assessments that result from a partnership audit adjustment. The current CTF performance measurements do not adequately reflect CTF’s assessments and case closures.  For example, the current CTF performance measurements count the closing of a partner’s tax year as a single case closure, even if that partner is linked with multiple partnership audits for which separate audit reports and partner adjustments must be made.Evaluate whether it would be beneficial to develop and implement updates to the CTF audit software to better accommodate certain adjustments and calculations. Currently, certain adjustments like the Alternative Minimum Tax are not automatic, so CTF must calculate these adjustments on a separate spreadsheet and input them manually.Evaluate the impact of the various legislative proposals on the IRS’s partnership audit process. For example, President Obama’s legislative proposal to treat all partnerships with more than 1,000 partners as an electing large partnership would affect only about 1% of all partnerships.The IRS agreed with all five of TIGTA’s recommendations but will only be able to implement the first and fifth recommendations due to a lack of funding.If you have any questions about this report or partnership audits, please contact one of us or any of the other Tax lawyers at Thompson & Knight.