The Internal Revenue Service has been examining only a tiny fraction of tax filings from large partnership filings due to staffing shortages and other resource constraints for auditing the complex returns, according to a new report.
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The TIGTA report noted that the IRS has traditionally experienced high "no-change" rates on closed partnership examinations, as the examination produced no adjustments to the partnership's return.
In October 2023, the IRS issued 483 soft letters (known as Letter 6585) to partnerships with balance sheet discrepancies. While these letters weren't necessarily examinations in themselves, failure to respond or provide adequate documentation to the letter could lead to an examination or audit. Of the 483 soft letters sent by the agency, the IRS didn't receive responses for 163 letters, rejected 182 responses for insufficient evidence or inadequate documentation, and accepted 138 responses.
"In April 2024, IRS officials decided they would not conduct examinations related to the soft letter responses because of resource limitations and insufficient time remaining on the assessment statute of limitations (the IRS generally has three years from the date a return is filed to examine the returns)," said the report. "While effective at identifying potentially problematic partnership returns, the soft letter campaign involved duplicative steps that consumed valuable time needed to conduct examinations."
However, the IRS hasn't completely stopped audits of large partnerships, although most of them were initiated prior to the staffing cuts this past year under the Trump administration. The IRS is examining 82 of the largest U.S. partnerships, according to the report, but most exams were ongoing as of December 2025. However, TIGTA found that not all large partnership returns were analyzed for selection because of a lack of available resources.
Before 2015, whenever the IRS examined or audited partnerships, the law required the IRS to carry any partnership examination adjustments down to the individual partners' tax returns, essentially requiring an exam of each partner. That situation made examining partnerships more complex and time-consuming than other taxpayers, such as a single corporation or an individual taxpayer, the report noted. The Bipartisan Budget Act of 2015 repealed the existing partnership procedures and replaced them with a new centralized partnership examination structure that enables the IRS to examine most partnerships at the entity level without having to examine each partner as part of the process. But, while any tax assessed during a partnership exam is now imputed to the partnership under the 2015 law, partnerships can still elect to push out the underlying adjustments to the individual partners.
The IRS believed it could increase the examination rate for large partnerships with additional funding from the Inflation Reduction Act of 2022. However, that funding was
"Since January 2025, the IRS has taken steps to reduce the size of its workforce to comply with the President's executive orders and Office of Personnel Management guidance," said the report. "The Pass-Through Entities Program had 1,079 employees in January 2025 and lost more than 20% of their staff by the end of December 2025. According to the IRS, they will need to reassess their exam coverage goals for large partnerships following the reduced staffing."
TIGTA recommended the IRS ensure future projects involving complex tax returns eliminate duplicative steps and consider the statute of limitations to allow enough time for compliance actions to occur. The report also recommended the IRS develop procedures to ensure that all large partnership returns filed throughout the year are considered for risk assessment. The IRS agreed with both of TIGTA's recommendations and plans corrective actions.
"The consolidated Pass-Through Entities Practice Area was created partly in response to the findings of various TIGTA and Government Accountability Office audits, which noted that the IRS has not historically examined a proportionate number of pass-through filings as compared to individuals and corporations," wrote Mabeline Baldwin, acting commissioner of the IRS's Large Business and International Division, in response to the report. "The IRS centralized different partnership groups under one umbrella organization, providing a more consistent approach and taxpayer experience to support more than 14 million U.S. filers — including partnerships, S corporations and trusts.
"Tiered partnership structures present challenges in identifying noncompliance because the noncompliance may occur in lower tiers that the IRS cannot readily identify when the IRS first reviews the transaction," Baldwin added. "As a result, examinations may result in a 'no-change' to the partnership return and instead propose adjustments to related returns. Therefore, measuring the impact of a partnership examination solely though the lens of the change to the partnership return does not capture the true compliance impact of the examination."
