On March 13, 2018, the IRS announced its first substantive Large Business and International Division (“LB&I”) compliance campaigns focused on partnerships and their partners. Although in January 2017, the IRS announced its intent to conduct a “TEFRA Linkage Plan Strategy Campaign” geared toward new procedures and techniques for assessing tax on partners after TEFRA-audits, its other 23 campaigns announced in 2017 were largely industry-specific campaigns, focused on discrete transactions, or focused on other kinds of taxpayers, such as individuals and foreign corporations. That changed last week with the announcement of three new campaigns focused uniquely on entities taxed as partnerships and their partners and members. The campaigns will focus on three particular circumstances: (1) individual partners or members who provided services to their partnership or LLC without reporting income subject to self-employment tax; (2) individual partners who have reported sales of partnership interests who may have improperly reported the character of their gain or loss; and (3) partnerships who have failed to file returns although continuing to engage in business activities and their partners who have not reported corresponding income. Partners and partnerships who fall into these categories may receive an examination notice for an issue-based examination, or a soft letter alerting them that their tax return may be incorrect. In addition, partners intending to sell partnership interests or report income from services to a partnership this year may want to watch for changes to forms and instructions, including in their tax software.
For more information regarding the new LB&I compliance campaigns, read our full alert here.