The agency plans to establish a special area to focus on large or complex passthrough entities , and has promised to hire more than 3,700 positions nationwide to help with expanded enforcement of “ complex partnerships ,” corporations and high-income taxpayers . This comes on the heels of the IRS issuing guidance for pass-through entities that report negative amounts to the IRS on Schedules K-2 and K-3 .

“ IRS enforcement activity is on the rise ,” says Miri Forster , a partner and national leader of the Eisner Advisory Group LLC ’ s Tax Controversy & Dispute Resolution practice group in Iselin , N . J . “ The IRS has spent time focusing more on partnerships and is hiring agents with lateral partnership expertise . These efforts are allowing the agency to understand specific pass-through issues which could result in tax abuse . [ The agency is ] also using data analytics and AI to select returns with the highest compliance risk .

“ IRS examinations of high-income taxpayers , many of whom have ownership in pass-through entities , are also on the rise ,” Forster says .

“ The focus is going to be on pass-through

“ The focus is going to be on pass-through entities — partnerships , LLCs and S corps — with the ripple effect on high-net-worth individuals .”

— Bill Smith entities — partnerships , LLCs and S corps — with the ripple effect on high-net-worth individuals ,” says Bill Smith , national director of tax technical services at CBIZ MHM in Washington , D . C . “ The target groups have experienced significant reductions in audit rates over the last 10 years .”

“ A spillover of this new campaign is likely to be an enhanced spotlight on S corps ,” adds Steve Parrish , adjunct professor and co-director of the Center for Retirement Income at the American College of Financial Services in King of Prussia , Pa . “ The IRS has long been concerned that some S corp owners have tried to dodge payroll taxes by declaring their earnings to be company profits rather than wages .”

Future tax developments loom for passthroughs , too . “ The 20 % qualified business income deduction for pass-through businesses has become a tax planning given ever since the enactment of the Tax Cuts and Jobs Act ,” Parrish says . “ This benefit will disappear beginning in 2026 . Considering the government ’ s need for revenue and the apparent inability in Congress to pass bipartisan legislation , pass-throughs should not assume this tax break will last forever . If Congress doesn ’ t act on this sunset , there will be a mad rush of business owners to their tax planners beginning in 2025 .”

“ The best advice is to make sure your financial records and your tax returns are complete and accurate — audit-proof ,” Smith says . “ As always , don ’ t let the tax tail wag the business dog : There are still opportunities , like taking advantage of 80 % bonus depreciation for eligible property placed in service by December 31 , but generally it ’ s a time to tend towards being fiscally conservative .”

— Jeff Stimpson

10 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2023 WWW . FA-MAG . COM