IRS Examinations: What You Need to Know

The IRS doesn't knock softly very often. When it does — through what's called a "soft-letter initiative" — smart partnership managers pay attention. When the Treasury Inspector General for Tax Administration (TIGTA) follows that up with a formal assessment of 82 major U.S. partnerships, the entire industry should take notes.

These aren't random audits of small operators filing questionable deductions. We're talking about systematic scrutiny of large, complex partnerships — exactly the structures that underpin most clean energy projects, infrastructure developments, and real estate ventures today. If your business involves a partnership arrangement of any meaningful size, understanding what the IRS found and what it's looking for next isn't optional.

Understanding IRS Examinations and the Soft-Letter Initiative

An IRS examination is, at its core, a formal review of a taxpayer's financial information to verify that income, deductions, credits, and other items are being reported accurately. For partnerships specifically, these reviews are considerably more complex than a standard individual or corporate audit. Partnerships don't pay federal income tax directly — they pass income, losses, and credits through to partners, each of whom may have their own distinct tax situation. That layered structure creates both flexibility and risk.

The soft-letter initiative represents a deliberate IRS strategy: identify potential compliance issues before they escalate into full-blown enforcement actions.

A soft letter is essentially a compliance nudge. The IRS sends it to signal that it has identified a pattern or anomaly worth examining — without immediately launching a formal audit. For the recipient, it's an opportunity to self-correct. For the IRS, it's an efficient way to address widespread issues across many filers simultaneously, without consuming the full audit resources each case would otherwise require.

What made TIGTA's recent assessment significant was its evaluation of whether this soft-letter approach actually works — and whether the IRS's subsequent examinations of 82 major partnerships were being conducted effectively. The findings carry implications far beyond those 82 entities.

What the Assessments Actually Revealed

TIGTA's review of both the soft-letter program and the 82 partnership examinations exposed something the IRS already knew internally but rarely acknowledges publicly: auditing large partnerships is genuinely hard, and the agency has historically struggled to do it well.

Large partnerships often span multiple states, involve dozens or even hundreds of partners, maintain complex tiered structures with sub-partnerships, and engage in sophisticated financial transactions. The IRS's own audit tools and examiner training haven't always kept pace with that complexity.

The 82 partnerships reviewed weren't a random sample — they represented some of the largest and most structurally complex entities in the country, making the findings a preview of where enforcement attention is heading.

Common compliance pressure points in large partnership examinations tend to cluster around a few recurring issues: the proper allocation of income and losses among partners, the valuation of contributed property, the treatment of guaranteed payments, basis calculations, and — critically for the clean energy sector — the legitimate use of tax credits. Partnership structures built to monetize Investment Tax Credits (ITC) or Production Tax Credits (PTC) are particularly intricate, and they draw scrutiny precisely because the financial stakes are enormous.

For context, a single utility-scale solar project might carry $50 million or more in ITCs. The tax equity partnership structures used to transfer those credits to investors must be constructed with surgical precision. A misstep in how the partnership is structured, how profits and losses are allocated, or how the credit is claimed can trigger an examination that unwinds years of planning.

Why Clean Energy and Infrastructure Partnerships Face Elevated Risk

The Inflation Reduction Act fundamentally expanded the tax credit landscape for clean energy. That's genuinely good news for the sector — but it also means the IRS is watching more money flow through more partnership structures than ever before.

Tax equity deals, which are the dominant financing mechanism for solar, wind, battery storage, and other clean energy infrastructure projects, are almost universally structured as partnerships. A developer brings a project; a tax equity investor brings capital in exchange for the lion's share of tax benefits. The structure is legally sound and commercially essential — but it requires meticulous documentation and compliance at every step.

Where there's significant tax benefit concentration, there's significant audit risk — and the IRS has made large partnership examinations an explicit enforcement priority.

The IRS Large Business and International (LB&I) division, which handles entities above $10 million in assets, has been building out its partnership audit capabilities for years. The Bipartisan Budget Act of 2015 gave the IRS powerful new tools under the centralized partnership audit regime (CPAR), allowing the agency to assess and collect tax at the partnership level rather than chasing down individual partners. Many large partnerships are still adapting to these rules, and that adaptation gap is itself a compliance risk.

Infrastructure developers, data center operators, and land developers working through partnership structures face similar pressures. Any arrangement involving accelerated depreciation, cost segregation studies, or carried interest is operating in territory the IRS considers worth examining closely.

Preparing for an IRS Audit: What Actually Works

The partnerships that fare best in IRS examinations share a few common characteristics. None of them are accidental.

Documentation is the first line of defense — not just having it, but having it organized in a way that tells a coherent story.

First, maintain a contemporaneous record of business purpose. Every structural decision in a partnership — why profits are allocated the way they are, why a particular asset was contributed at a specific valuation, why a guaranteed payment was structured as it was — should have a documented rationale that existed at the time the decision was made. Reconstructing justifications after an audit notice arrives is a red flag that experienced IRS examiners recognize immediately.

Second, take the centralized partnership audit regime seriously if you haven't already. The CPAR rules determine who speaks for the partnership in an audit, how adjustments are assessed, and whether partners can opt out. If your partnership agreement hasn't been updated to address these rules, that's a material vulnerability.

Third, treat soft letters as the warning they are. If the IRS sends a compliance letter, the right response isn't to file it away — it's to conduct an internal review, engage qualified tax counsel, and determine whether any self-correction is warranted before the examination escalates.

Finally, for clean energy and infrastructure partnerships specifically: ensure that the economic substance of your tax credit structures is airtight. The IRS applies the "economic substance doctrine" to scrutinize arrangements where the primary purpose appears to be tax avoidance rather than legitimate business activity. Tax equity structures that were built to survive this scrutiny — with genuine risk transfer, legitimate profit motive, and proper allocation mechanics — will hold up. Those that weren't won't.

Where IRS Examination Policy Is Heading

The trajectory here is clear. The IRS received substantial additional funding under the Inflation Reduction Act for enforcement, technology, and staffing. Large partnership examinations are explicitly identified as a priority use of those resources. TIGTA's assessment was partly designed to ensure the agency is deploying those resources effectively.

What this means practically: expect more examinations, faster. The IRS is investing in data analytics that can flag anomalies across thousands of partnership returns simultaneously — the kind of pattern recognition that previously required manual review. The soft-letter initiative will likely expand as a cost-effective way to address widespread issues before they require full audit resources.

The partnerships that view compliance as an ongoing discipline rather than a periodic scramble will be positioned to grow through this period of heightened scrutiny rather than being slowed by it.

For clean energy developers and infrastructure investors, the regulatory environment has never been more favorable in terms of available tax incentives — and never more demanding in terms of documentation and structural rigor. Those two realities aren't in conflict. The developers who build compliance infrastructure at the same pace they build physical assets will find that IRS examinations are manageable. Those who treat compliance as an afterthought will find that a single audit can cost more than years of shortcuts saved.

The TIGTA assessment of 82 major partnerships isn't just a government report. It's a map of where enforcement attention is concentrated — and a clear signal that the era of flying under the radar on complex partnership structures is over.

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