When Congress passed the Inflation Reduction Act (IRA) in 2022, the IRS appeared poised for a historic rebuild: nearly $80 billion was allocated over 10 years, with $45.6 billion reserved for enforcement initiatives such as large-partnership audits. Nearly three years later, the political winds have shifted. Lawmakers have rescinded $41.8 billion of the $80 billion allocated in the IRA, $20.2 billion of which was clawed back from the enforcement funds, shrinking the agency’s enforcement budget just as it tries to police some of the nation’s most complex investment structures. Specifically, the National Taxpayer Advocate, in her midyear report to Congress released June 25, indicated that the IRS lost over a quarter of its workforce between deferred resignation programs and reductions in force by the Department of Government Efficiency. Additionally, details of the White House’s framework for fiscal 2026 funding released May 30, indicate an allocation of $3.6 billion for enforcement, down 33% from $5.4 billion for fiscal 2024 and 2025.
Partnerships — especially hedge funds, private equity vehicles, and real estate syndicates — have exploded in size and complexity over the past decade. Responding to criticism that these entities were under-audited, the IRS created the Large Partnership Compliance (LPC) program, and in 2023, announced AI-assisted examinations targeting 75 partnerships with average assets of $10 billion each. The agency’s broader plan was to scale the LPC model to hundreds more entities by 2026.
Effective partnership oversight is not merely a revenue issue. It is central to the IRS’s 2025-2026 Priority Guidance Plan, which solicits public input on regulations needed to keep the entire tax system working. If budget reductions stall that work, the compliance gap for large funds and other pass-through entities could widen, even as artificial intelligence (AI) finally gives the IRS tools to see through opaque structures.
How Funding Cuts Threaten the Audit Plan
Fewer specialist hires
The IRS anticipated adding thousands of accountants, data scientists, economists, and tax experts to unravel tiered partnership structures. With funding in flux, recruiting has slowed, and retention bonuses are harder to justify, making it harder to compete against the private sector.
Delayed technology upgrades
AI-driven risk scoring and modern case-management systems require multiyear capital outlays. A shrinking budget forces the agency to triage between maintenance and modernization.
Reduced guidance capacity
Drafting and finalizing partnership-specific regulations — especially on hot-button issues such as basis adjustments and pass-through credits — relies on the same personnel who would otherwise conduct audits. Limited staff means slower, less comprehensive guidance.
Watchdog groups warn that the result will be wider compliance gaps and more opportunities for aggressive tax planning.
What Fund Managers Should Do Now
Budget uncertainty offers no carte blanche, as partnership scrutiny clearly remains top priority for the IRS. Instead, it creates a window to tighten controls before scrutiny resumes.
| Immediate Action | Why It Matters |
|---|---|
| Refresh books and records and tax documentation to satisfy the Bipartisan Budget Act (BBA) partnership-audit rules. | Accurate, readily retrievable data streamlines any future exam and reduces adjustment risk. |
| Update partnership agreements to spell out who will make “push-out” elections and how audit adjustments flow through to partners. | Clear language prevents disputes and preserves flexibility if the IRS restarts large-scale exams. |
| Inform investors about potential audit risks and how the push-out election can be used to limit entity-level tax liabilities. | Communicating transparently helps fund managers manage investors’ expectations and reduce surprises. |
| Stay engaged in guidance. Submit comments on Notice 2025-19 and monitor the Priority Guidance Plan. | Proactive feedback can shape guidance items that are most important to the industry. |
Conclusion
A trio of rollbacks to IRS enforcement — the rollback of IRA funding, reduction in the workforce, and potential reduction in funding allocation in the upcoming budget — jeopardizes the IRS’s most promising attempt yet to lift the veil on large partnerships. Without sustained resources, the agency will struggle to hire experts, deploy AI tools, and produce the guidance practitioners need. In the near term, fund managers gain a brief reprieve to shore up compliance; in the long term, they face a regulatory environment that could snap back harder once resources — and political will — return.
Sound tax administration depends on predictable enforcement and clear rules. Both are at risk if Congress continues to chip away at the IRS budget, leaving complex partnerships and the billions they manage largely unchecked.
Have Questions?
Have questions about how the IRS funding cuts could impact your partnership? Reach out to a CBIZ tax professional today.
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