Family Office Considerations For Partnership Audits

Published date18 May 2022
Subject MatterAccounting and Audit, Tax, Audit, Income Tax
Law FirmWithers LLP
AuthorMr William Kambas and Victoria Diaz

Families and Family Offices engaged in managing privately held capital often use partnerships to consolidate and aggregate capital from related and/or unrelated parties and trusts. This is true for family investment programs, joint ventures, and pooled capital and or club deals. In any case, those managing any partnership, whether a general partner of a limited partnership, a manager of a limited liability company taxed as a partnership or any variation on either of these structures (such as limited liability limited partnerships, series limited liability companies and other variations) need to be aware of developments and evolutions in the way the IRS reviews and audits partnerships. Since Family Offices may be in a position of management, this is a particularly sensitive issue for family office professionals.

In May 2022, we learned of renewed use of an old tool for federal IRS audit strategies of partnerships.

The Current Development: IRS Audits Employing the Partnership Anti-Abuse Rule

In early May 2022, an official from the IRS discussed an expected increase in the use of a particularly broad regulatory scheme applicable to partnerships. Specifically, Cliff Warren of the IRS Office of Associate Chief Counsel (Passthroughs and Special Industries), speaking at an April 29 Practising Law Institute conference, acknowledged that the broadly-worded regulation known as the "partnership anti-abuse rule" will be invoked in audits of partnerships more frequently than it historically has been.

This is a logical and potentially anticipated approach in the private client space following the 2019-2020 development around the IRS's Global High Wealth ("GHW") Program. That program has been described by the IRS as formulating a holistic approach in addressing the high-wealth taxpayer population. In so doing, the IRS has created a deliberate and intentional process to review "the complete financial picture" of high-wealth individuals and the enterprises they control. Specifically, the IRS has already explained that the GHW enterprise case consists of a key case, generally an individual income tax return, and all related income tax returns, including related partnerships. There is some question about the appropriate scope and breadth of the GHW audits and review.

Putting the Rule into Context

The partnership anti-abuse rule, which is lengthy and contains a number of examples, was issued in 1994. Treas. Reg. ' 1.701-2(a) sets forth the "intent of Subchapter K" of the...

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