Is the IRS Losing Control Over Partnership Audits?

For years, the IRS has struggled to effectively audit complex partnerships. With recent developments at the agency—including a sudden leadership change and funding cuts—serious doubts have resurfaced. Will the IRS have the resources and stability to manage this critical area of tax enforcement, or will partnerships exploit these vulnerabilities for years to come?

A Brief History of TEFRA and Its Challenges

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) was introduced to bring order to the IRS’s approach to auditing partnerships. Prior to TEFRA, the IRS had to separately audit each partner’s tax return, which proved inefficient for partnerships with many partners. TEFRA sought to centralize audits at the partnership level while still requiring a complex, multi-tiered process.

Under TEFRA, partnerships had the option to appoint a Tax Matters Partner (TMP) who acted as a liaison between the partnership and the IRS. The TMP played a central role in representing the partnership during audits, but the law still required the IRS to issue notices and potentially negotiate adjustments with each individual partner. Furthermore, any partner could challenge IRS findings, leading to delays and prolonged disputes. This made large-scale audits cumbersome and inefficient, particularly for partnerships with hundreds or thousands of partners.

By the mid-2010s, it became clear that TEFRA’s framework was inadequate for modern, increasingly complex partnership structures. Congress recognized the need for a more streamlined system, culminating in the creation of the Centralized Partnership Audit Regime (CPAR).

The Centralized Partnership Audit Regime (CPAR)

The Bipartisan Budget Act of 2015 (BBA) established CPAR, which took effect for tax years beginning in 2018. CPAR fundamentally changed how partnership audits are conducted by fully centralizing the process at the partnership level. The key difference under CPAR is the role of the Partnership Representative, who has sole authority to act on behalf of the partnership in all audit matters. Unlike the Tax Matters Partner under TEFRA, the Partnership Representative’s decisions are binding on all partners without the opportunity for individual partners to challenge IRS adjustments directly.

In addition, under CPAR, the IRS can assess and collect underpayments (known as imputed underpayments) directly from the partnership itself, rather than from individual partners. Partnerships may elect to "push out" these adjustments to partners, but this is at their discretion. These changes were designed to eliminate procedural delays and reduce administrative burdens.

Challenges in Implementing CPAR

Despite its streamlined design, CPAR faced significant implementation challenges. The COVID-19 pandemic delayed the IRS’s plans to begin CPAR audits, which were originally slated to start in 2020. The agency, struggling to adapt to remote work, paused new audits until 2023. During this time, the IRS also dealt with chronic underfunding and staffing shortages.

The situation improved temporarily with the passage of the Inflation Reduction Act, which allocated $80 billion to strengthen IRS enforcement efforts. By 2024, the IRS began targeting large partnerships for audit, focusing on entities with complex structures. However, a subsequent $20 billion funding cut and a federal hiring freeze halted much of this progress.

A Leadership Crisis at the IRS

The abrupt resignation of IRS Commissioner Danny Werfel on President Trump’s Inauguration Day has further destabilized the agency. Werfel, who was halfway through his five-year term, had been instrumental in implementing the IRS’s strategic enforcement initiatives. His replacement, former Congressman Billy Long, has sparked controversy due to his lack of experience in tax administration. Long’s legislative history includes proposals to dismantle the IRS entirely, raising concerns among tax professionals about his ability to lead the agency effectively.

Colin Walsh, a principal at Baker Tilly, as quoted in Thomson Reuters Checkpoint Newsstand on February 5, 2025, described Long’s appointment as “a seismic shift” in IRS leadership. “Anyone who thinks this won’t change the agency’s direction is kidding themselves,” Walsh remarked. Critics fear that Long’s tenure will deprioritize audits of complex partnerships, further complicating enforcement efforts under CPAR.

The Future of Partnership Audits

With reduced funding, leadership instability, and a hiring freeze, the IRS faces an uphill battle in maintaining its audit capacity. However, the agency is exploring ways to leverage data analytics and artificial intelligence to streamline audits. By identifying patterns and anomalies across tax returns, the IRS hopes to conduct more targeted and efficient audits.

Walsh advises partnerships to remain vigilant and proactive in their compliance efforts. “This is not the time to cut corners,” he warned. “Partnerships need to carefully select their representatives and understand their responsibilities under CPAR.”

While the current situation presents significant challenges, it is unlikely that Congress will dismantle CPAR entirely. Streamlining partnership audits remains a bipartisan priority, even if enforcement levels fluctuate with changes in administration and funding.

So, can the IRS keep up with complex partnerships? The answer is: yes, but not without significant hurdles. The agency faces serious obstacles, from leadership turmoil to resource constraints, but it also possesses powerful tools to counter these challenges. Partnerships should remain cautious, as the IRS is unlikely to abandon its oversight responsibilities.

As the dust settles on these recent upheavals, one thing is clear: partnerships that underestimate the IRS may find themselves facing audits sooner than expected. The future of partnership audits may be uncertain, but it is far from doomed.