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IRS Focus on Partnerships

Copyright 2003, The Tax Resource Group, all rights reserved.

For many years, the conventional wisdom has been the IRS does not pay much attention to partnerships. That seems to be changing. First we have the attempt to match K-1s to partner 1040s. Now it appears the IRS is directing examination resources in the direction of partnership returns. 

In May of 2003, a practitioner in Utah reported attending a seminar and being told by an IRS representative of a new initiative focusing on partnership returns. That same practitioner reported that one of his partnership clients came under examination. The Information Document Request (IDR) demanded not only the returns of the partnership but also all the partners as well.

It appears as if the IRS is using partnership examinations to go on a fishing expedition into the returns of the partners. Think about it: the partnership examination is a perfect way to leverage examination resources. If the taxpayer cooperates (i.e., voluntarily hands over the tax returns of the partners), the IRS gets to evaluate whether the returns of the partners appear to be promising examination prospects. This is a very easy way for the IRS to generate revenue with minimal expenditure of examination resources.

In addition, the IDR demanded a tax basis study for all partners since the inception of the partnership. That was the case even though there were no obvious basis issues in play in the examination. Obviously, in many cases such a basis study would be either quite onerous or even impossible to produce.

It seems to me the wise response to the request for partner tax returns is as follows. The partners are not under examination. The partnership has no means of compelling the partners to produce returns for use in an examination of the partnership's tax return or for any other purpose. 

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