The IRS barely audits taxpayers that file as large partnerships, and it bungles the selection process for those that it does audit by failing to pick the returns likeliest to be in arrears, Congress’ chief watchdog reported.
Large partnerships — those that report at least $100 million in assets and 100 partners — have exploded in popularity, rising nearly 600% to more than 20,000 as of 2019. They are complicated and difficult to audit.
And in most cases, the IRS doesn’t even try.
The Government Accountability Office said in its report Thursday that the IRS did just 54 audits of large partnerships in 2019, or 0.3%. In 2007, by contrast, the agency audited 1.4% of them.
“Large partnerships are the Wild West of tax compliance,” said Sen. Ron Wyden, Oregon Democrat and chairman of the Senate Finance Committee. “Congress never intended for large partnerships to become the granddaddy of all tax loopholes.”
He said they have become a place for wealthy people to “make their taxes simply disappear.”
The GAO report comes at a time when the IRS is under intense pressure and scrutiny.
Democrats say the agency has been letting wealthy tax cheats off the hook, cutting back on audits and letting hundreds of billions of dollars in owed taxes go uncollected.
They injected tens of billions of dollars last year into the IRS to stiffen audits and enforcement.
Republicans worry about unleashing the IRS, pointing to abusive practices and behavior ranging from targeting tea party groups for intrusive scrutiny to losing taxpayers’ information to hacks and leaks.
The GOP is pushing to cut back on Democrats’ cash infusion to the IRS.
Mr. Wyden said the new report should stiffen Democrats’ spines and help them defend against the proposed cuts. And he said Congress should crack down on partnerships themselves.
He said 70% of partnership income goes to the top 1%.
The IRS gave a host of excuses for why the audit rates are so low.
At the top of the list were limited resources and the complexity of partnerships.
“Many large partnerships have multiple levels or tiers of partnerships with hundreds of thousands of partners. Tiered large partnerships are challenging for IRS to audit because tracing transactions through the tiers to the ultimate partners is complex,” the GAO said.
Investigators said the method the IRS has been using to select which partnerships to audit is flawed. It didn’t home in on those returns likeliest to contain shenanigans.
GAO said that 80% of the time, the large partnerships the IRS does audit result in no added taxes paid.
That means either the IRS doesn’t pick the right audits or lacks the capability to detect cheats.
The IRS said the use of partnerships has grown alongside other structures such as S corporations. Both are considered pass-through entities, where the partnership reports activity but doesn’t pay any corporate tax. Instead, the partners pay tax on the income they derive from the partnership.
As of 2019, there were 20,052 large partnerships, holding an average of $818 million in assets. GAO said 394 of them held more than $5 billion assets — with 46 of that size in 2022.
The IRS, in its official response to the GAO report, said it’s trying to adapt.
It has set a goal of doubling its audit rate for large partnerships by 2025 and has several hiring and training initiatives to reach that target.
• Stephen Dinan can be reached at sdinan@washingtontimes.com.
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