Pass-Through Entity Tax Compliance Will Be a Priority for the IRS in 2025

More partnerships, S-corporations, limited liability companies (LLCs) and trusts can expect to face scrutiny from the Internal Revenue Service (IRS) in 2025. The same is true for individuals who own these pass-through entities. The IRS recently announced the formation of a new pass-through field operations unit that will be “increase[ing] audit rates” in this area, with a specific focus on high-income taxpayer noncompliance. Learn more from Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.

New IRS Field Operations Unit Will Target Entities and Their Owners

Pass-through entities avoid the “double taxation” that applies to C-corporations under the Internal Revenue Code. While some C-corporations and shareholders can achieve net tax savings under this regime—and while certain deductions and other benefits are available to double-taxed entities are not available to pass-through entities—many businesses find it advantageous to elect for pass-through treatment.

But, according to the IRS, pass-through entities also present high risks for tax evasion and fraud.

In its October 22, 2024, News Release announcing the formation of its new pass-through field operations unit, the IRS states that pass-through entities “are frequently used by higher-income groups and can be complex tax arrangements.” It also notes that hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms are already facing scrutiny. While there is nothing inherently unlawful about using pass-through entities for tax planning purposes, it is clear that the IRS believes many pass-through entities are actively being used to evade federal tax liability at the entity and individual levels.

Notably, however, while high-income taxpayer enforcement may be one of the IRS’ top priorities underlying the formation of its new pass-through field operations unit, this is not the agency’s sole focus. The IRS has also made clear that its new field operations unit will target pass-through entities “regardless of entity size,” and the unit includes personnel from both the Large Business and International (LB&I) and Small Business/Self-Employed (SB/SE) divisions.

Facing a Pass-Through Entity Tax Audit from the IRS

If you get contacted by revenue agents from the IRS’ pass-through field operations unit, what do you need to know—and what do you need to do? Fundamentally, this scenario is no different from facing any other type of IRS audit. A proactive and strategic defense is required, and you will need to engage experienced tax counsel who can help resolve the audit without unnecessary consequences. From improperly claiming pass-through treatment to improperly claiming deductions, there are ways to defend against all of the allegations that can come up during these types of audits. The key is to make informed decisions based on a clear understanding of both the relevant facts and the relevant law.

Request an Appointment with Washington D.C. Tax Attorney Kevin E. Thorn

If you need help responding to a federal pass-through entity tax audit, we encourage you to contact us promptly for more information. To request an appointment with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033 or contact us confidentially online now.