The Internal Revenue Service Needs To Reconsider Its Examination Strategy for Certain Partnership Returns

A GAO study of the Internal Revenue Service (IRS) administration of the partnership tax laws dealt with the IRS program for examining traditional partnerships as opposed to those partnerships established for tax shelter purposes. The report discusses IRS processes for setting examination goals and developing discriminate function system formulas for identifying those traditional partnership returns most in need of examination. Since 1978, IRS has given greater emphasis to examining partnership returns. This resulted primarily from increased use of partnerships for tax sheltering purposes and IRS wanting to have an aggressive program for identifying those programs that violate the law. The program included a doubling of its examination goal and increased use of an approach in which the partnership return is the starting point for many examinations. IRS also separated partnership returns into four audit classes. IRS generally equated the partnership class with losses of $25,000 or more with tax shelters, and equated the remaining classes with traditional partnerships. IRS reasoning was that traditional partnerships are usually formed to generate a profit while shelter partnerships are usually formed to generate a loss.