During a Practicing Law Institute program on April 25, 2023, Internal Revenue Service (IRS) attorney Clifford Warren disclosed that the IRS has actively used the anti-abuse rule outlined in Treasury Regulation Section 1.701-2 to closely examine various partnership transactions. Warren said the IRS will likely continue to use this rule as it ramps up enforcement.

So what is this rule and what does it mean for you (and/or your clients)? Let’s take a closer look.

What is the anti-abuse rule?

The anti-abuse rule prevents taxpayers from gaining tax advantages through partnership transactions if the primary purpose of such transactions is to significantly reduce their income tax. However, this rule is a little controversial, since many see it as unconstitutional. 

How can I avoid getting audited by the IRS?

If you’re involved in a partnership agreement, whether as an individual or corporation, here are a few things to do to make sure you don’t end up on the wrong side of the anti-abuse rule:

• When entering a new partnership transaction, make sure your advisors are familiar with the anti-abuse rule and other IRS policies

• If you’re already in an arrangement, review any potential risks and take steps to address them

• If you’ve received an audit note from the IRS regarding your partnership, seek advice from a tax professional immediately

As the IRS continues using the anti-abuse rule to assess partnership arrangements, it’s important to be proactive in understanding what IRS policies mean for you and whether or not your partnership transactions comply. 

If you need help, it’s never a bad idea to consult with a tax professional (and you can find plenty right here on TaxGlobal).