IRS expands hiring efforts, focuses on partnership audits

The IRS is planning to hire an additional 10,000 employees over the coming weeks and months. These new personnel will concentrate on an ever-increasing focus on partnership audits as well as assisting with return backlog and technology modernization. Open positions, which the IRS will begin posting later this month, will range from entry-level clerical jobs to tax specialists and attorneys to engineers.

Staffing has been a major obstacle for the IRS over the last decade. The agency has lost approximately 20,000 employees since 2010, dwindling their workforce to the current level of 74,000. If the IRS is successful in hiring 10,000 new employees, it will represent an increase of 14%.

In an effort to expedite the hiring process, the IRS requested and was granted direct hiring authority from the Office of Personnel Management. This permission will allow the agency to bypass some of the more onerous procedures typically required for federal positions. In addition, there are reports of exemptions to federal salary caps that will help the IRS recruit experts who are currently working in the private sector.

While the omnibus legislation currently making its way through Congress does increase the IRS’ annual budget, it is unclear how much of the proposed $12.6 billion is stipulated for employee hiring and retention.

Focus on partnership audits

The IRS is ramping up scrutiny of pass-through entities, with a particular focus on partnership taxation.

According to a recent Bloomberg article, Lauren Troderman, team manager for pass-through entities at the IRS, said the agency is trying to increase its number of partnership audits since its need to look at partnerships has intensified in response to the rising number of partnership filings.  

Audits of large partnerships are expected to escalate as the IRS implements the Large Partnership Compliance (LPC) Pilot Program. The LPC program, which began in late 2021, targets partnerships with over $10 million in assets. Under the new system, data analytics of certain criteria are used to identify partnerships with the highest risk of noncompliance. Entities selected for audit will not center on a single issue; instead, the entire return will be subject to examination.

The LPC audit process will focus on not only the current examination, but also the collection of data. The IRS will use LPC audit findings to refine algorithms, further improve methods of identifying issues and assess the compliance risk of partnership tax filings.

The Large Business and International (LB&I) Division of the IRS also has two active partnership campaigns:

• Partnership losses in excess of basis: focuses on the section 705 outside basis requirements needed to claim flow-through losses from partnerships
• Sale of partnership interest: addresses taxpayers who do not report the sale or do not correctly compute the gain or loss of a partnership interest disposition

The IRS is searching for attorneys, revenue agents, tax law specialists and other experts to fill out their partnership team. Accordingly, partnership filers, particularly large partnerships, should ultimately expect to see an increased rate of audit.

IRS backlog

The IRS began the 2022 filing season with a backlog of almost 24 million items — 17.6 million tax returns and 6 million items of unaddressed taxpayer correspondence, according to the National Taxpayer Advocate, Erin Collins. The accumulation of unprocessed tax returns and correspondence has drawn the criticism of taxpayers, tax professionals and Congress.

While a majority of the 10,000 new IRS openings will be in positions to assist with processing the backlog, it is unlikely the agency will be able to catch up in the short term. A recent Washington Post article reported that “a government official said the IRS does not expect the backlog to resolve until the end of 2022.”

Hiring obstacles

The IRS has struggled to hire staff in recent years. Collins pointed out in her Feb. 17, 2022, congressional testimony that the IRS had only successfully filled 179 of the 5,000 open positions for customer service representatives. She further testified that low pay is affecting the IRS’ ability to hire employees.

The previously mentioned Washington Post article examined some of the IRS’ staffing issues, reporting that at the agency’s tax processing center in Kansas City, Missouri, “employees are working six-day weeks with mandatory overtime.” In addition, that center is facing wage competition; entry-level employees make $15 per hour but nearby retailers are offering 25%-60% more in starting hourly wages.

Exacerbating the IRS’ current staffing issues is the fact that almost 25% of the agency’s current national workforce of 74,000 employees are eligible for retirement. While the IRS is looking to hire 10,000 people in the short term, an additional 18,000 positions could see vacancies if experienced employees choose to retire.

We encourage you to connect with your Baker Tilly advisor regarding how any of the above may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.