IRS Partnership Audit Brain Drain Is an Opportunity for States

The IRS under the second Trump administration has quietly dismantled much of its partnership audit program. Many of the specialists hired to lead it have either been “DOGE’d,” fired, or otherwise fled. Audits have stalled, and nothing in the federal pipeline looks ready to replace it. If someone doesn’t pick it up soon, it may not be coming back.

But maybe states can help. If the federal government is abandoning partnership enforcement, states—especially high-income states—have every reason to step in, as a pool of trained, experienced partnership auditors are suddenly available.

When we talk about the collapse of something like the IRS’s partnership audit initiative, it’s easy to think of the situation as akin to funding cuts elsewhere in the government. If one administration cuts funding to a given agency, some people may suffer for a time—but when another administration takes office, it can turn the money spigot back on.

Considering the human element, though, that may not be enough to get back what was lost.

Partnership auditors were never just revenue agents. They are specialists trained in the mechanics of tiered entities, allocation shenanigans, and arcane structures that don’t show up on a tax return unless you look at just the right angle.

You can’t just pull someone from corporate audits, drop them into a $10 billion private equity structure, and hope they can find their way around. You can’t train someone in the byzantine Subchapter K with a three-ring binder and some video tutorials. There is institutional memory that only exists in the heads of a select group of people—most of whom, it seems, may now have no home in the federal government.

There is also no real private-sector equivalent. The firms that hire former IRS specialists aren’t doing enforcement work; they’re likely helping clients stay ahead of enforcement, for the most part. When these experts leave the IRS, many of them may stop being auditors entirely.

When that happens, there is no bench for a future administration to pull from. There is no group of seasoned experts to train the next cohort and no one to monitor what’s happening in a corner of the economy that is cloaked in shadows.

The loss of federal enforcement is not only a national tax problem but also a state budget issue. High-income states such as California, New York, Massachusetts, and Illinois are also exposed to the pass-through tax strategies the IRS was starting to police. Those states rely heavily on progressive income taxes, and when high earners shift their income through opaque structures or offshore entities, that revenue disappears from state coffers just as it vanished from federal ledgers.

High-income, high-pass-through states should create or expand dedicated partnership units within their revenue departments.

Photographer: Luke Hales/Getty Images

States have long outsourced this part of enforcement to the federal level, piggybacking on federal audits, case law, and data. That has always been a risk, but now it’s a glaring vulnerability.

Few imagined the IRS would let this much capacity rot, yet it just did. States are now the last line of defense.

The silver lining is that the window likely hasn’t fully closed yet. The IRS may have dismantled the partnership audit program, and DOGE may have done its thing, but the people who built it are still out there. They just need a new home, and state departments of revenue are well-positioned to provide one.

Imagine if California or New York spooled up a dedicated partnership audit program inside their departments of revenue, staffed with former IRS specialists. These auditors would need minimal training and wouldn’t need to be briefed on the underlying theory. They’d just need institutional support and a terminal.

High-income, high-pass-through states should create or expand dedicated partnership units within their revenue departments. These units could focus on auditing large partnerships operating within the state—a decidedly smaller target with reduced, but still important, rewards. With relatively modest investment, states could begin reclaiming lost revenue that would otherwise disappear into shadowy entities and deferred gains.

And why stop with a single state? There’s also a case for a multistate enforcement compact here. Modeled on existing state coalitions, audit findings, methodology, and even staff could be shared among signatories.

Think of it as a decentralized IRS replacement—a federated structure that can operate with or without Washington’s blessing. States already collaborate on sales tax collection through such compacts. There’s no reason why they can’t do the same with partnership audits to some degree.

The collapse of the IRS partnership audit program is a story about what happens when given expertise becomes politically inconvenient and how quickly hard-won institutional capacity can unravel. But if states act quickly, they can salvage what the federal government has thrown away.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

Read More Technically Speaking