IRS examines a tiny percentage of large partnership tax returns

The IRS is falling down on the job, at least when it comes to large partnerships.

That’s according to a March 18 report by the Treasury Inspector General for Tax Administration (TIGTA), pointedly titled “The IRS Has Yet to Develop a Successful Strategy for Examining Large Partnership Returns.” In tax year (TY) 2023, the IRS examined less than 0.1% of returns filed by partnerships with assets over $10 million, TIGTA said. That’s down from 2.7% in TY 2011.

That’s a concern, because the number of large partnerships has more than doubled in the past 15 years. In TY 2011, 140,577 large partnerships filed with the IRS; in TY 2023, 334,686 did. Improved oversight of returns could help shrink the “tax gap,” or the difference between taxes owed and collected. In TY 2022, partnerships and entities like estates and trusts were responsible for an estimated $42 billion of the $696 billion US tax gap.

Too “soft” on partnerships? TIGTA studied some of the IRS’s recent efforts to review large partnership returns, and found them lacking. In October 2023, for instance, the agency’s Soft Letter Campaign alerted partnerships to amend discrepancies on their returns voluntarily. It sent Letter 6585 to 483 partnerships notifying them of discrepancies, but they weren’t required to respond. Two-thirds (66%) of the partnerships responded and one-third (34%) did not. The IRS accepted 43% of the responses.

But, in April 2024, the IRS said it wouldn’t examine any partnerships involved in the Soft Letter Campaign due to “resource limitations” and the fact that too little time was remaining due to statutes of limitations.

Most exams result in no changes. Under the Large Partnership Compliance Program, the IRS used AI to vet 282,884 TY 2021 returns of partnerships with over $10 million in assets. Ultimately, it selected 82 for examination. But the agency only ran the case selection model once, TIGTA noted, instead of multiple times, as usually happens. By not analyzing all partnership returns, TIGTA warned, the IRS “provides an opportunity for large partnerships to evade a layer of review and reduces their examination potential.”

Of the 82 returns, 43 are still being examined, while 36 have been closed. But the IRS requested no changes to 92% of those 36, TIGTA observed. High no-change rates, it said, “may be a measure of inefficiency, because the IRS expends time and resources on the examination but makes no adjustments to the taxes owed.”

TIGTA recommended that the IRS implement procedures for reviewing all large partnership returns, that it omit duplicative procedures, and that it reexamine the statute of limitations. The agency agreed with all of TIGTA’s suggestions and said it will take steps to address them.

But the agency has a daunting task ahead of it. The IRS has projected that it will receive even more large partnership returns—some 469,800—this year, and it’s also working with a reduced headcount. In 2025, its Pass-Through Entities Program, which reviews partnerships, lost more than 20% of its 1,079 employees.