Focus on Partnerships
Copyright 2003, The Tax Resource Group, all rights reserved.
For many years, the conventional
wisdom has been the IRS does not pay much attention to partnerships. That
seems to be changing. First we have the attempt to match K-1s to partner
1040s. Now it appears the IRS is directing examination resources in the
direction of partnership returns.
In May of 2003, a practitioner in Utah
reported attending a seminar and being told by an IRS representative of a
new initiative focusing on partnership returns. That same practitioner
reported that one of his partnership clients came under examination. The
Information Document Request (IDR) demanded not only the returns of the
partnership but also all the partners as well.
It appears as if the IRS is using partnership
examinations to go on a fishing expedition into the returns of the partners.
Think about it: the partnership examination is a perfect way to leverage
examination resources. If the taxpayer cooperates (i.e., voluntarily hands
over the tax returns of the partners), the IRS gets to evaluate whether the
returns of the partners appear to be promising examination prospects. This
is a very easy way for the IRS to generate revenue with minimal expenditure
of examination resources.
In addition, the IDR demanded a tax basis
study for all partners since the inception of the partnership. That was the
case even though there were no obvious basis issues in play in the
examination. Obviously, in many cases such a basis study would be either
quite onerous or even impossible to produce.
It seems to me the wise response to the
request for partner tax returns is as follows. The partners are not under
examination. The partnership has no means of compelling the partners to
produce returns for use in an examination of the partnership's tax return or
for any other purpose.