The IRS's Constraints on Large Partnership Audits (7/21/12)

I am adding the following to both texts (the nonfootnoted text at  p. 490 (Insert at the end of the page (i.e., at the end of the section on Large Partnerships) and the footnoted text at p. 674 at the end of the Large Partnerships section):

There is some concern that large partnerships, particularly those whose operations are on the scale of large corporations, not electing under this simplified procedure and thus remaining subject to the TEFRA rules are not audited as frequently as they should because of the difficulty of implementing the TEFRA rules.  An author recently noted:

Hampered by the 1982 Tax Equity and Fiscal Responsibility Act, the law governing large partnership audits, and its aging information technology systems, the IRS lacks the capacity to audit more than a few large, widely held partnerships each year. 

That capacity constraint -- a numerical figure known to only a select few at the IRS -- concerns the number of partner-level tax bills that the IRS can send out each year. Because partnerships are passthrough entities, IRS agents can't determine the resulting net tax revenue from any partnership-level adjustments until they've calculated their impact on a partner-by-partner basis (as some partners may be tax-exempt foreigners, pension funds, or taxpayers with net losses). If the IRS doesn't audit the partnership itself, it generally can't challenge the partnership profits and losses reported on an individual partner's return. 

The problem is severe enough that the Obama administration has proposed treating some very large partnerships as corporations for audit purposes.

The quote is from Amy S. Elliott, Audit Proof? How Hedge Funds, PE Funds, and PTPs Escape the IRS, 136 Tax Notes 351 (July 23, 2012).  The article is quite good and offers more detail than I can offer in this survey book.