Authored by RSM US LLP
Artificial intelligence (AI) is reshaping how the IRS examines partnerships. Here’s what that means for your industry and how you can stay compliant.
The IRS’ use of AI is transforming the way it identifies noncompliance in large partnerships. For industries like private equity and real estate, the implications are significant. This infographic examines discrepancies that could attract IRS scrutiny and offers insights on navigating these challenges.
Trigger #1: IRS’ AI-driven compliance checks
The IRS is more effective in identifying discrepancies in large partnerships using AI. These advancements go beyond simple error detection—they involve sophisticated algorithms that analyze historical data, cross-reference financials and predict future discrepancies.
Real estate
- Why it matters: Multistate and international property holdings often complicate tax reporting, increasing the likelihood of discrepancies.
- Stay compliant: Regularly review and adjust your reporting practices. Consider implementing predictive analytics tools that mirror IRS methods to preemptively identify and correct potential issues before they trigger an audit.
Private equity
- Why it matters: Complex fund structures and varied investment portfolios can lead to discrepancies in filings, attracting IRS attention.
- Stay compliant: Use predictive analytics to anticipate and correct potential issues before the IRS flags them.
Trigger #2: Inconsistent or inaccurate data
AI’s ability to cross-reference returns means that even minor inconsistencies can lead to an audit. The IRS has increasingly focused on data integrity, especially for partnerships with significant cross-border or multistate operations.
Real estate
- Why it matters: Property valuation fluctuations and income recognition from sales or leases require precise reporting to avoid inconsistencies.
- Stay compliant: Regular data audits and advanced data management systems are essential to maintain consistency across different asset types and jurisdictions.
Private equity
- Why it matters: Different valuations and reporting standards across investments can lead to data inconsistencies, raising red flags for the IRS.
- Stay compliant: Implement robust data management systems that ensure accurate, consistent reporting across all investments.
Trigger #3: Complex partnership structures
Complex partnership structures are prone to errors, which can increase the risk of IRS audits.
Real estate
- Why it matters: Joint ventures, real estate investment trusts (REITs) and property syndications require intricate tax planning and reporting, making them susceptible to errors.
- Stay compliant: Simplify wherever possible and ensure complex structures are clearly and accurately reflected in all tax filings.
Private equity
- Why it matters: Layered fund structures, carried interest arrangements and foreign investments add complexity, increasing audit risk.
- Stay compliant: Regularly review your organizational structure to ensure it aligns with best practices in reporting.
Trigger #4: Manual tax processes
Manual processes are increasingly risky as the IRS leverages AI to uncover patterns and anomalies humans might miss. Manual processes are particularly challenging for partnerships managing large volumes of transactions or complex investments.
Real estate
- Why it matters: Paper-based or outdated systems may not capture the nuances of multistate property tax obligations, leading to errors.
- Stay compliant: Transition to automated systems that can handle the complexities of your industry, improving the speed and accuracy of reporting.
Private equity
- Why it matters: Manual processes struggle to keep up with the rapid pace of deal-making and investment management, increasing the likelihood of errors.
- Stay compliant: Automate your tax processes to reduce errors and enhance the speed and accuracy of reporting in a fast-paced environment.
Trigger #5: Lack of audit preparedness
With the IRS’ focus on partnerships, particularly in high-risk sectors like private equity and real estate, audits are more likely and being unprepared can lead to significant disruptions.
Real estate
- Why it matters: Multijurisdictional holdings require detailed, accessible records to support audit inquiries.
- Stay compliant: Develop a comprehensive audit readiness plan that includes regular mock audits and scenario planning tailored to your industry.
Private equity
- Why it matters: The complexity of fund structures and diverse income streams make audit preparation critical to avoid disruptions.
- Stay compliant: Prepare documentation that can quickly address inquiries and regularly conduct mock audits to ensure readiness.
Navigating IRS scrutiny in your industry
As AI reshapes IRS enforcement, private equity and real estate partnerships must prioritize accuracy and compliance. By understanding the industry-specific triggers and taking proactive steps, partnerships can confidently navigate the complexities of tax audits and focus on growth.
Source: RSM US LLP.
Reprinted with permission from RSM US LLP.
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