The Internal Revenue Service needs to do a better job on its partnership examinations, according to a new report from the Treasury Inspector General for Tax Administration.

Before the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, audits of partnerships were essentially conducted as audits of the business' individual partners. Each partner's return was examined separately, and the determination and treatment of partnership items for one partner was not binding on any other partner.

For partnerships subject to the 1982 law, the treatment of items is determined at the entity level in one unified examination. The act requires every partnership have a tax matters partner who serves as a liaison with the IRS, that tax adjustments to the partnership are made in one examination and are binding to all partners, and that special notices are issued and procedures followed by the IRS at the beginning and end of examinations.

However, the TIGTA report found that despite IRS controls and an emphasis on case file documentation, additional steps must be taken to ensure procedures are properly followed when partnership examinations are initiated. Of 60 partnership return examinations closed between Oct. 1, 2003, and June 30, 2005 and examined by the inspector general's office, one or more required procedures was not followed in more than half.

Among the report's top recommendations to the IRS:

  • Examiners need to take better advantage of IRS resources when conducting partnership examinations;
  • Quality controls should be strengthened; and,
  • Examiners and managers should be held accountable for following all of the procedures outlined in the 1982 law.

The full report is available at www.ustreas.gov/tigta/auditreports/2006reports/200630106fr.pdf.

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