The future of the IRS’ plans and ability to enforce partnership tax compliance pursuant to now 10-year-old legislation is uncertain in light of recent turnover at the top of the IRS, President Trump’s federal hiring freeze, and the potential future cuts to Inflation Reduction Act (P.L. 117-169) funding, according to an experienced tax professional.
CPAR. Before 2018, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA, P.L. 97-248) governed rules and procedures on partnership audits. The Bipartisan Budget Act of 2015 (BBA, P.L. 114-74) replaced TERFA with the current Centralized Partnership Audit Regime, or CPAR. The Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113) and the Technical Corrections Act of 2018 (P.L. 115-141) both amended the BBA.
Partnerships became subject to the BBA starting tax year 2018. Under CPAR, partnerships designate a partnership representative on their tax returns unless they make a valid election out of CPAR. Such designations apply only for the applicable tax year, and representatives must have substantial presence in the U.S.
Partnership representatives possess the sole authority to act on behalf of the partnership for audit procedural purposes, and the partnership and partners are bound to their actions. Examples of actions a representative may take include extending statutory adjustment periods, entering into settlement agreements, and responding to notices of partnership adjustments.
The IRS assesses and collects understated tax — an imputed underpayment, or IU — at the partnership level. But partnerships can request modifications to the IU and elect to, as an alternative, push out the adjustments underlying the IU to the partners.
Small sample size. Colin Walsh, principal and the practice leader of Baker Tilly’s tax advocacy and controversy services, told Checkpoint that the expectation was that CPAR or BBA audits (used interchangeably) would begin in the spring of 2020 for returns filed in fall of 2019.
But because of the COVID-19 pandemic, the IRS “as a matter of policy … put a hold on new exams,” said Walsh. The immediate impact of the pandemic had taxpayers and their preparers “in a really difficult state.” Meanwhile, the IRS “was ill-equipped to work remotely” and could not “really break from its policy” of not initiating CPAR audits “until 2023.”
For a new regime like CPAR, enacting legislation is only the first step “to effectuate” it, Walsh explained. “And then you need resources to go implement it.” In August 2022, the IRS, through the Inflation Reduction Act, was set to receive $80 billion over 10 years, most of which was marked for compliance enforcement.
In 2024 there was a sense of normalcy, with CPAR fully underway and the IRS beginning to spend Inflation Reduction Act funds in accordance with its Strategic Operating Plan. Last year, professionals like Walsh had felt like they knew “exactly what the IRS is going to do. They have a roadmap. They have this new partnership audit task force. They’re hiring people.”
With its new funding, the IRS “selected 80 of the largest partnerships in the country for exam,” said Walsh. “About $7 billion” of the funding “was spent on enforcement, and this is one of their big initiatives.”
However, this new normal was short-lived and serves as only a small sample size for measuring CPAR’s performance.
IRS turnover and funding. Several recent events have cast uncertainty over the future of CPAR.
First, roughly $20 billion from the total Inflation Reduction Act appropriation to the IRS was rescinded on January 1, reflecting agreements made between former President Biden and the 118th Congress during budget negotiations. The IRS indicated this would not affect projects as much in the short term but would accelerate when the funds would run out.
In response to the clawbacks, though, the IRS put a pause on its ongoing hiring spree and overall expansion.
Danny Werfel, a Biden appointee, stepped down as IRS commissioner on President Trump’s Inauguration Day to facilitate a smooth transition of power between administrations. In December, then President-elect Trump announced plans to nominate former Congressman Billy Long to head the agency.
Critics questioned if Long possesses relevant credentials for the job and pointed to his legislative track record, which includes a proposal to abolish the IRS entirely. Others pointed out that Werfel was only halfway into his five-year term, making his resignation a bit of a surprise.
“[T]o have someone with more of a political and a business background, working for the IRS has to be different,” Walsh said, and “anyone who thinks it’s not going to change is kidding themselves.”
Regardless of one’s opinion on the pick — who will supplement the now-confirmed Treasury Secretary Scott Bessent — Long is not “cut from a similar cloth” as prior IRS commissioners, according to Walsh, who expects Long to not “take the same approach as his predecessors.”
The Biden administration and the IRS with Werfel at the helm iterated that the agency would be using new revenue agents and other onboarded staff to target only large corporations, complex partnerships, wealthy individuals, and non-filers.
Generally, the Inflation Reduction Act was meant to restore IRS resources to levels closer to around 2010, before the agency’s annual budget granted by Congress diminished year-over-year. The prior administration pledged to not examine those making less than $400,000 beyond historical levels.
What’s next? “The lack of IRA funding is going to have a bigger impact than the change in the commissioner,” Walsh predicted, “because the IRS simply cannot enforce or roll out these initiatives without financial resources. It’s just not going to happen.”
Congress, back under two Republican majorities, could potentially rescind the remaining $58 billion, or at least only the enforcement bucket and not funds for customer service, technology modernization, and operations.
In addition to the IRS’ self-imposed hiring freeze, Trump issued an executive order instituting a universal hiring freeze across all federal agencies, so the IRS must make do with the staff it has.
Walsh suggested the IRS could lean on “the utilization of data and artificial intelligence” to enforce CPAR but reduce the amount of time that it takes to identify issues on a tax return. By leveraging AI-discovered data patterns to streamline CPAR audits, “the IRS could show up on the first day of an exam and have already compared one income tax return with 100 other similarly situated tax returns and identified a specific issue.”
Amidst all this uncertainty, partnerships should give extra consideration to who is designated the partnership representative, Walsh recommended. Partnerships “should be a little bit more careful” and “understand the difference between the tax matters partner under TEFRA and the partnership representative under CPAR. It’s a different role.”
Walsh said there will continue to be “more exams” despite tempered expectations, so partnerships would put themselves at a disadvantage by not choosing their representative wisely.
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