IRS Establishing New Unit to Crack Down on Tax Dodging by Pass-Throughs

A new work group within the Large Business and International (LB&I) division will be tasked with holding large partnerships and other pass-through businesses accountable to pay the full amount of taxes they owe, the IRS said on Wednesday.

The new pass-through unit will include many of the 3,700 agents the IRS is planning to hire in an effort to ramp up tax compliance efforts against high-income earners, complex partnerships, large corporations, and promoters.

“We are honing-in on areas where we believe noncompliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns,” IRS Commissioner Danny Werfel said in a statement on Sept. 20. “This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come.”

The Inflation Reduction Act, which was enacted in 2022, set aside nearly $80 billion for the IRS over a 10-year period to bolster its enforcement of wealthy tax cheats. 

The announcement of the new pass-through unit comes nearly two weeks after the IRS said it would open examinations of 75 of the largest partnerships in the U.S. that on average have over $10 billion in assets by the end of September. The agency said it will be using improved technology, including artificial intelligence, to better detect tax cheating by large partnerships and wealthy earners, identify emerging compliance threats, and improve audit case selection tools.

Pass-through organizations, including large partnerships and S corporations, will be the focus of the new work unit within LB&I. The IRS noted that these groups are not subject to the corporate income tax, but instead income is “passed through” onto the income tax returns of the individual or corporate owners and taxed at their income tax rates. Pass-throughs are frequently used by higher-income groups and can be complex tax arrangements.

LB&I Commissioner Holly Paz announced the creation of the new pass-through unit during a speech at a Tax Executives Institute meeting in New York on Wednesday.

“This is an important change we will be making, and we will be working in the months ahead to efficiently and effectively transition to this new group,” Paz said. “This effort will include working inside the IRS, as well as working with external partners, to ensure this is a smooth transition period for everyone involved.”

The IRS said it will be coordinating with the National Treasury Employees Union on the effort. The work group will formally “stand up” late next year, Paz said, but work involving pass-through areas will continue to increase before that time. The group will eventually expand to include employees from both the LB&I and the IRS Small Business/Self-Employed division, according to the IRS.