IRS Plans to Ramp Up Audits with New Pass-Through Entity Enforcement Initiative

Late last year, the Internal Revenue Service (IRS) announced plans to create a new “work unit” focused on pass-through entity enforcement. On October 22, 2024, the IRS announced that its new pass-through field operations unit “has officially started work.”

This new field operations unit is focusing specifically on pass-through entity tax compliance—and it is targeting both entities and their owners. While the new unit is pursuing enforcement “regardless of entity size,” the IRS’ October 22 News Release states that it is “part of the overall expanded enforcement efforts that focus on high-income and high-wealth individuals, partnerships and large corporations that have seen sharp drops in audit rates during the past decade.” Learn more from New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group:

Pass-Through Entity Tax Compliance Will Be an IRS Priority in 2025

As the IRS’s latest announcement makes clear, pass-through entity tax compliance will be among the agency’s top enforcement priorities in 2025. When auditing pass-through entities and their owners, revenue agents with the agency’s new field operations unit will be looking for evidence of any and all forms of non-compliance. This includes, but is by no means limited to, common issues that are specific to pass-through entities such as:

• Improperly claiming pass-through tax treatment
• Improperly claiming deductions that are not available to pass-through entities or their owners
• Improperly documenting, reporting and paying entities and owners’ tax liability
• Failing to pay entity-level tax (even pass-through entities must pay tax in some cases)
• Using pass-through entities to execute unlawful tax avoidance schemes

These issues, among others, can expose pass-through entities and their owners to substantial liability for back taxes, interest and penalties. When revenue agents uncover apparent evidence of willful tax evasion or tax fraud, they can also lead to criminal scrutiny. The IRS’ Criminal Investigation Division (IRS CI) is actively involved in the agency’s efforts to enforce pass-through entity compliance as well, and it routinely conducts investigations targeting partnerships, S-corporations, limited liability companies (LLCs), trusts, and other pass-through entities used for both business and personal purposes.

Preparing for an IRS Pass-Through Entity Audit

Given the IRS’ focus on pass-through entity tax compliance, what can (and should) owners of these entities do to prepare for the possibility of facing an IRS audit in 2025?

For pass-through entity owners who have concerns about facing scrutiny, now is a good time to conduct a comprehensive compliance assessment. If an audit could lead to substantial liability (and potentially a criminal referral), taking a proactive approach can substantially mitigate the risks and costs involved in dealing with the IRS. There are a variety of options available for proactively resolving tax issues in this scenario—the key is to choose the right option based on the specific circumstances at hand.

Request a Confidential Consultation with New Jersey Tax Attorney Kevin E. Thorn

If you need more information about the IRS’ pass-through entity enforcement efforts, we encourage you to contact us promptly. To request a confidential consultation with New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 201-842-7696 or inquire online today.