Internal Revenue Service data released Feb. 22 shows that partnerships and S corporations were audited at higher rates in fiscal year 2015, up 18.6% and 11.1%, respectively, says Alvarez & Marsal managing director Tyler Horton. This trend is likely to continue and perhaps accelerate after new audit regimens go into effect in 2018. The new rules allow the government to collect tax adjustments at the entity level, rather than from individual partners, which will significantly shift the burden from the IRS to the taxpayer. Further, IRS Chief Counsel William Wilkins confirmed on March 15 that the IRS will be taking a closer look at more partnerships and devoting more resources to the partnership area. Wilkins also warned partnership taxpayers that there may be some roughness and imperfect results as the IRS develops new systems to support its increased partnership audit activity.

Unfortunately, this all comes at a time when decreased government budgets have dramatically reduced the number and experience level of IRS personnel, as evidenced by a handful of high-profile erroneous determinations over the past year or so. Smith v. Commissioner is a recent example of the challenges that partners may face in coming years. Steven Smith is a partner at Bryan Cave who faced an IRS assessment that resulted from a clerical error on his firm’s partnership tax return. Mr. Smith could not resolve this matter through the normal administrative channels, and ultimately had to file a claim in US tax court to successfully end that dispute.

Because most real estate is held in partnerships, it is likely that increased IRS partnership audits and related enforcement activities will be a significant topic for our industry. Tyler says the firm already started to see the beginning of the trend in its practice and is available to share insights to help clients prepare for this new environment. For more information on our Bisnow partner, Alvarez & Marsal, click here.