A flow-through or pass-through business funnels income straight to its owners , shareholders or investors so only these individuals — and not the entity — are taxed on the revenues .

Pass-throughs are often used legitimately to avoid double taxation , but clients involved regardless of size , centralizing expertise and aiming to increase audit rates .”

Richard Pianoforte , managing director of tax at Fiduciary Trust International in New York , says , “ The IRS has said that with the help of artificial intelligence they ’ ll be able to better detect compliance issues and tax evasion .”

The IRS has also hired Jeffrey Erickson as the first associate chief counsel for the agency ’ s new Passthroughs , Trusts and Estates Office .

Pass-throughs are often used legitimately to avoid double taxation , but clients involved with them need to know that the IRS finally has a new investigative division that will look even harder at the structures .

with them need to know that the IRS finally has a new investigative division that will look even harder at the structures .

“ This includes a new office focusing exclusively on partnerships , S corporations , trusts and estates , as well as a specialized work group within [ the IRS ] Large Business and International Division ,” says Dave Alison , founder and CEO of Alison Wealth Management in Charleston , S . C . “ Previously , audits of pass-throughs were divided between different IRS divisions based on the entity ’ s size . The new unit will handle pass-through exams

According to Bill Smith , national director of tax technical services at CBIZ ’ s national tax office in Washington , D . C ., Erickson “ is very sophisticated in partnership tax and is likely to create the type of training and issue focus that will bring his team up to speed on how to audit large partnerships fairly efficiently .” Who will be targeted first ? In June , the IRS said it plans to crack down on a partnership tax loophole called “ basis shifting transactions ,” where high-income taxpayers and corporations shift basis from assets that are not generating tax benefits to ones that do . “ Clients engaged in this strategy are likely candidates for an audit ,” says Jeffrey T . Getty , managing director for business and transaction advisory with Callan Family Office in Radnor , Pa .

Additional audit targets , Getty says , likely include partnerships whose returns are reported in tiered structures where it ’ s difficult to determine if income is properly reported at different levels . The IRS will also be looking at returns from partnership and trust investment vehicles that do not withhold taxes on U . S . income when it comes through structures owned by foreign investors . Another audit target would be estate and gift-tax returns that reflect low-tax or no-tax transfers of assets to younger generations .

“ Any other pass-through strategies that appear overly complex , contain unusual or complex financial products or reduce or eliminate federal transfer tax strategies are likely going to increase the chance of audit ,” Getty says . Clients should ensure they ’ re comfortable that their returns are prepared properly , that all required information is included in the return and that they and their tax advisor have a plan for an audit if one occurs .”

Alison says that clients and their advisors can assume the IRS will step up the rate of audits on these tax breaks . “ So clients and their professionals need to be prepared for the workload that comes with an IRS audit ,” he says , noting that the Inflation Reduction Act allocated billions to the IRS to increase compliance , particularly among businesses . Wealthy clients should realize by now that they ’ re gaining renewed attention from the IRS , but many of them are not acting to strengthen their financials , advisors say .

“ Not only do they receive communications from their accounting and law firms , but [ the IRS initiative ] has been in the news ,” Smith says . “ It tends to get swallowed up by the bickering over IRS funding , however , and I think they don ’ t feel any immediate need to address it .”

— Jeff Stimpson

14 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2024 WWW . FA-MAG . COM