The IRS Has Yet to Develop a Successful Strategy for Examining Large Partnership Returns

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Summary

In October 2023, the IRS issued Letter 6585, Soft Letter Pass-Through Entity Campaign, to 483 partnerships whose balance sheets contained a discrepancy. The IRS uses voluntary compliance letters, otherwise known as “soft letters,” to alert taxpayers to potential issues with their tax returns. A soft letter is not an examination activity but can be a way to alert taxpayers of potential noncompliance. Although a response to a soft letter is not required, failure to provide a response, or providing an inadequate response, could result in an examination. Of the 483 soft letters sent to large partnerships, the IRS did not receive responses for 163 letters, rejected 182 responses for insufficient evidence or inadequate documentation, and accepted 138 responses. In April 2024, IRS officials decided that they would not conduct examinations related to the soft letter responses because of resource limitations and insufficient time remaining on the assessment statute of limitations (the IRS generally has three years from the date a return is filed to examine the returns). While effective at identifying potentially problematic partnership returns, the soft letter campaign involved duplicative steps that consumed valuable time needed to conduct examinations. In a separate large partnership initiative, the IRS is examining 82 of the largest U.S. partnerships, and most exams were ongoing as of December 2025. However, we observed that not all large partnership returns were analyzed for selection because of a lack of available resources. Since January 2025, the IRS has taken steps to reduce the size of its workforce to comply with the President’s executive orders and Office of Personnel Management guidance. The Pass-Through Entities Program had 1,079 employees in January 2025 and lost more than 20 percent of their staff by the end of December 2025. According to the IRS, they will need to reassess their exam coverage goals for large partnerships following the reduced staffing.