IRS to Prioritize Pass-Through Entity Tax Compliance in 2025

The Internal Revenue Service (IRS) has established a new pass-through field operations unit that will focus specifically on auditing partnerships, S-corporations, limited liability companies (LLCs), trusts and other pass-through entities in 2025 and beyond. While this new field operations unit will be prioritizing high-income taxpayer compliance, the IRS has made clear that it will be working to “ensur[e] compliance of pass-throughs of every size and form.” Learn more from Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.

Pass-Through Entities of All Sizes Can Face High-Risk Audits and Investigations

Over the past several years, the IRS has paid relatively little attention to pass-through entities. This was not by choice, but rather the result of a lack of funding. Now, however, with additional enforcement funding under the Inflation Reduction Act, the IRS is once again ramping up its efforts to target pass-through entities and their owners.

The IRS’ new pass-through field operations unit will be auditing partnerships, S-corporations, LLCs and trusts of all sizes. It will also be auditing these entities’ owners. Federal pass-through income tax audits can lead to substantial liability for both entities and individuals—including liability for back taxes, interest and penalties.

These audits can also lead to criminal charges in some cases.

Beyond simply looking for evidence of noncompliance, revenue agents in the IRS’ new pass-through field operations unit will be looking for evidence of willful noncompliance—including the use of “complex tax arrangements” to evade federal income tax liability. Willful tax evasion is a federal criminal offense, and while pass-through entities can face substantial fines, their owners can face both fines and prison time.

Making Sure Your Pass-Through Entity (and You Personally) Are Prepared for an IRS Audit

With this in mind, if you are an owner of a partnership, S-corporation, LLC, trust or other pass-through entity, what should you be doing at this stage? If you are not yet facing scrutiny from the IRS’ new pass-through field operations unit, there are some steps you will want to take promptly. These include:

• Assess Your Federal Pass-Through Tax Compliance Record – Now is a good time to ensure that your pass-through entity’s federal returns and your personal returns from the past several years are accurate. If they are not accurate, you should take appropriate remedial action promptly.
• Address Any Tax Compliance Concerns Proactively – Depending on the circumstances involved, at this stage, appropriate remedial action can range from filing an amended return to submitting a voluntary disclosure. Informed decision-making is critical for avoiding unnecessary risks.
• Make Sure You Are Prepared to Defend Against an IRS Audit if Necessary – Even if you do not have concerns about compliance, you will still want to make sure that you are prepared to effectively defend against an IRS audit if necessary. Among other things, this means ensuring that you have adequate documentation on hand to substantiate your pass-through filings.

Request a Confidential Consultation with Virginia Tax Attorney Kevin E. Thorn

Do you have questions or concerns about federal pass-through income tax compliance? If so, we can help, and we encourage you to contact us promptly for more information. To request a confidential consultation with Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 703-752-3752 or tell us how we can reach you online now.