Long Waits and Partnership Audits Muddy New Tax Season

The IRS is facing new challenges this tax season, including adapting to a new partnership audit system, employee retention credits, and overall changes in enforcement focus. Practitioners and taxpayers should keep several key factors in mind while the IRS adapts.

Communication Conundrum

In its annual report to Congress, published on Jan. 10, the Taxpayer Advocate shared that only 29% of calls were answered by a live person in fiscal year 2023.

While this was a significant increase from 13% in fiscal year 2022, these results are still less than the IRS’s service goals. The IRS continues to make efforts to improve these results; however, taxpayers and their professionals will still need to be patient in the meantime. An increase in funding should soon enable to agency to provide the higher levels of service.

Long Waits

Taxpayers and their professionals must often provide responses to the IRS, and, in some cases, adjustments must come through amended returns. Taxpayers have been frustrated by significant delays encountered in corresponding with the IRS.

The Taxpayer Advocate report showed that as of Oct. 28, 2023, there were 4.3 million requests for adjustments still pending and an additional 1.9 million amended returns still pending. This combined total was equal to the amount still pending as of Dec. 31, 2022, with the amount showing as still pending that was carried over from the end of the prior fiscal year equal to 69.5%.

In many cases, there is little that taxpayers can do other than wait patiently for the IRS to act.

Partnership Audits

The Bipartisan Budget Act of 2015, now nearly a decade old, made significant changes to the examination of partnership returns. Under the prior Tax Equity and Fiscal Responsibility Act of 1982, the IRS could only identify changes at the partnership level.

To assess additional tax, the IRS was required to open a separate examination at the partner level, which wasn’t always an administratively easy task.

With the BBA process, no partner-level involvement is necessary. The IRS has broadly taken the view that any “money number” that can be identified as a discrepancy between the partnership return and what the IRS deems as correct can become the subject of an imputed underpayment and an assessed tax equal to 37% of such number.

Partnerships wishing to avoid this tax must either provide proof of amended returns filed by the partnership or file a push-out election through specific forms. Both processes require statutory deadlines. In both circumstances, different IRS personnel are often required to process changes to move to the next step.

Taxpayers and their professionals may feel these processes are more difficult than anticipated, and some may need to resubmit documents electronically and have received varying answers on completing the forms.

When faced with statutory deadlines, taxpayers and their professionals may feel more stress as the IRS works to standardize its processes.

Taxpayers may also notice that some examiners are quick to impose imputed underpayments, including for issues that might seem minor on the surface, such as classification of liabilities (recourse versus non-recourse). This may not have been anticipated when the law was passed.

Employee Retention Credits

The employee retention credit program, created to provide incentives to small businesses to retain employees, has garnered concern from the IRS because of overly aggressive ERC mills advising taxpayers to claim the credits.

Of course, it hasn’t helped the situation that Congress didn’t provide greater clarity around eligibility, particularly for the term “partial shutdown.” IRS Commissioner Danny Werfel has also expressed concerns about fraud to Congress. A legislative change to the ERC program—including an early termination of the program and an extension of the statute of limitations—has been discussed as part of the bipartisan tax package pending in Congress.

Taxpayers may see a lot of varied conclusions from the IRS in connection with examinations on ERC matters. The IRS has both reviewed refund claims and examined taxpayer returns after payment.

The ERC program is less than four years old, and there is no longstanding historical experience inherent within the IRS with respect to the ERC. Taxpayers and their professionals are likely to experience a wide variety of examination conclusions within the IRS, given that there are likely to be examiners with very different experiences administering tax laws—none of which previously related to the ERC.

Taxpayers may encounter examinations from experienced and inexperienced examiners. While it appears that the IRS seeks to standardize its approach as much as possible, some of the issues involved with deciding ERC claims will involve judgment. Taxpayers and their professionals may find that who is exercising this judgment matters.

Taxpayers and their professionals need to continue to exercise patience, at least in the short run. As the IRS acquires new resources and staff gains experience, taxpayers and their representatives will see significant service improvements.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brett Bissonnette leads Plante Moran’s tax controversy services practice and frequently represents clients before the IRS. He’s also a leader in the firm’s National Tax Office.

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