Audit Resistant Partnerships on the Rise

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.

GAO Releases Report Bashing IRS Whistleblower Office

The IRS is bound by act of Congress to pay tax whistleblowers up to 30 percent of the revenue collected as a result of information they provide, so long as the amount in dispute is more than $2 million. But the Government Accountability Office (GAO) does not believe the IRS is complying like they should.

Since the Whistleblower Office was established in early 2007, IRS has received over 1,300 whistleblower submissions qualifying for the expanded program, alleging tax noncompliance by more than 9,500 taxpayers. As of May 12, 2011, IRS has paid a small number of awards under the expanded program. . . . As of April 2011, about 66 percent of claims submitted in the first 2 years of the program, fiscal years 2007 and 2008, were still in process.  ~ GAO

Of course, the IRS can’t officially say exactly how much award money has been paid to whistleblowers because it would violate the IRS’s privacy protections. The same protections apparently prevent the IRS from keeping whistleblowers in the loop as far as the status of their claims.

The Whistleblower Office is a mess.  Is it really too surprising though, that the agency charged with collecting revenue has a hard time dishing it back out?  The IRS has buried itself in minutia on these cases to, as they say, “ensure the integrity of the claim.” It’s not collecting data on the amount of time each step in the process takes, and it has failed to establish deadlines and accountability for those working these cases.  If the IRS wants this program to incentivize whistle-blowing and voluntary compliance, then it had better turn things around. If not, the Whistleblower Office is going to quickly make a bad name for itself.

See full report here.