Prepping for Increased IRS Audit Activity

With the Internal Revenue Service announcing more details on how it will be targeting America’s wealthiest taxpayers, Kostelanetz’s Megan Brackney offered up some advice on preparing for increased compliance activity.

The first step, especially for those that fall within the agency’s announced parameters for who is being targeted, is to review recent tax filings. The agency announced in September it would be targeting large partnerships.

“I would say to look back over the last three years because that’s the typical statute of limitations period for the IRS to audit and assess, maybe look back even a little bit longer,” Brackney, partner at the law firm, said in an interview.

In particular, she recommended a focus on major financial transactions.

“Look at significant transactions and make sure that you have all the substantiation because a lot of times, the issue isn’t so much a legal question or anything to complex,” she continued. “It’s just whether or not you know [for example if] the partnership sold an asset, do they actually have records that substantiate their basis?”

Brackney expects that after the agency completes its work on the largest partnerships, it will continue this kind of compliance work on those high earning partnerships that may be outside of the original targeted thresholds.

Other things to start thinking about if you are a large partnership is how you plan to respond to an audit if you end up targeted for enforcement action by the IRS, especially if you have significant transactions that might draw extra scrutiny. Some questions to ponder are whether you have the in-house expertise to handle an audit or if you plan on going to an outside source.

“Nobody is going to do those things until they are actually audited, but its good to start thinking about it and planning it,” she said. “And if you do have a really significant transaction, maybe go ahead and have someone take a look at it already to make sure it is properly documented.”

She also suggested that if a partnership finds an error as they look back on their own to go ahead and correct it with the IRS before the agency “is poking around and looking at it.”

Training Concerns

And while the IRS is moving forward with its plans to audit high earning partnerships, Brackney expressed some concerns relative to agent training.

She recalled a few years ago when the IRS announced global high net worth audits program that ended up collecting very little.

“Most of those audits resulted in no change letters,” Brackney said, “which is wild because you audit a normal middle-class taxpayer with a Schedule C business, you are going to have a change [and] not because anybody is trying to cheat. There is going to be something that they can’t substantiate.”

She said it was hard to understand how most of the global high net worth audits had no changes, and expressed some concerns that this could happen again, but is hopeful that with the agency’s supplemental funding from the Inflation Reduction Act will come proper training to handle the complexities of reviewing these tax returns.

“I support the IRS being fully funded,” she said. “It’s good for tax administration and it makes a fairer society because it’s not like people are just getting away with stuff because the IRS doesn’t have the resources.”

By Gregory Twachtman, Washington News Editor