The Internal Revenue Service has been warning that it would step up tax audits. It’s finally happening, beginning with partnerships and certain wealthy individuals.
“If a partnership’s responses to the questions in these letters aren’t adequate to satisfy the IRS, it will be audited,” Friedlich says. Other red flags are if a proportion of income or losses claimed by a partner doesn’t align with his or her percentage interest in the entity, if there has been a sale of partnership interest, or if a partnership’s tax return shows that a partner claimed an exception to paying the self-employment tax.
The tax gap refers to the roughly $700 million the IRS believes it is owed, but that goes uncollected each year. The number of these sophisticated structures has exploded in recent years as the IRS’s enforcement capabilities were steadily weakened by funding cuts.