IRS Intensifies Large Partnership Audits, Leveraging AI for Enhanced Oversight
The Internal Revenue Service (IRS) is significantly increasing its scrutiny of large partnerships, employing recent statistical models and artificial intelligence (AI) to identify potential audit candidates. This heightened focus comes as the agency seeks to address the challenges posed by the increasing complexity of these business structures and ensure greater tax compliance. A recent Government Accountability Office (GAO) report highlights the IRS’s efforts to strengthen audit processes for large partnerships, which represent a substantial portion of tax revenue.
The Growing Complexity of Partnership Audits
Large partnerships present unique challenges for the IRS due to their intricate structures and the volume of transactions they handle. According to a GAO report, the IRS is working to address these challenges, including resource limitations and duplication in audit efforts. The agency’s new approach involves using data analytics and AI to pinpoint high-risk partnerships for audit.
AI-Powered Audit Selection
In April 2023, the IRS piloted a new statistical model to identify 150 large partnership returns from the 2021 tax year for potential audit. This initiative is contingent upon the successful hiring and training of personnel related to funding from the Inflation Reduction Act (IRA). The use of AI aims to improve the efficiency and effectiveness of audit selection, allowing the IRS to focus its resources on areas with the highest potential for revenue recovery.
Return on Investment in Partnership Audits
Auditing complex partnerships can yield significant returns for the government. One study cited in a GAO report found that for every dollar spent auditing these entities, the government recovers approximately $20. This high return on investment underscores the importance of the IRS’s increased focus on partnership audits.
Bipartisan Budget Act of 2015 and New York State Reporting Requirements
The federal Bipartisan Budget Act of 2015 (BBA) brought about substantial changes to the audit and tax collection procedures for partnerships, establishing a centralized partnership audit regime. These changes generally took effect for tax years beginning January 2018. In 2025, New York State enacted legislation requiring partnerships and partners impacted by the BBA to report these changes to the state’s tax authorities.
Under New York State law, unless a partnership elects for alternative payment, federal changes resulting from a finalized audit or an administrative adjustment request (AAR) with the IRS must be reported on amended returns within 90 days. This includes filing an amended Form IT-204, Partnership Return, for the reviewed year or the year adjusted by the AAR.
Key Takeaways
- The IRS is increasing its audit activity targeting large partnerships.
- AI and data analytics are being used to identify high-risk partnerships for audit.
- Audits of complex partnerships offer a substantial return on investment for the government.
- The Bipartisan Budget Act of 2015 significantly altered partnership audit procedures.
- New York State now requires reporting of BBA-related changes by impacted partnerships.