The IRS generally can include returns filed within the last three years in a tax audit. There are exceptions, but the IRS normally does not go back further than three years. What you may not know is that the IRS has the same amount of time to audit large partnerships. According to a recent report from the Government Accountability Office (GAO), it takes the IRS about 18 months of preparation and fact finding before they can even begin this type of audit. GAO considers a partnership large if it has more than 100 partners and $100 million or more in assets.
The GAO report underscores the necessity of tax reform. There are some 20-year old provisions, such as this one, that don’t make sense anymore. Large partnerships can be very complex, with multiple tiers of partners, making it very difficult to determine where to start. Many of today’s large partnerships are finance and insurance firms, and it’s great for them, but the IRS really hasn’t been able to effectively audit them.
This problem has become more acute in the past 10 years or so since the number of pass-through entities such as partnerships has been on the rise and the number of corporations has been declining. Very interesting statistics from GAO:
The number of large partnerships has more than tripled to 10,099 from tax year 2002 to 2011. Almost two-thirds of large partnerships had more than 1,000 direct and indirect partners, had six or more tiers and/or self reported being in the finance and insurance sector, with many being investment funds.