Increased IRS Scrutiny of Family Limited Partnerships

The WSJ reports ($ubscription required) that:

The IRS is intensifying its scrutiny of family limited partnerships, a popular technique for reducing estate and gift taxes.

The heightened scrutiny comes as the Internal Revenue Service has stepped up enforcement more broadly, increasing the number of audits it performs. The agency has said it plans to focus more resources investigating taxpayers with incomes of $100,000 and above. Officials also are focusing especially on what they call abusive shelters, or transactions with no real economic purpose other than evading taxes.

As part of its deepening probe into family limited partnerships, the IRS is questioning more of these transactions and taking a harder line during audits, seeking evidence of whether they really were set up for legitimate business purposes -- or merely as an elaborate tax dodge, officials say. In an increasing number of cases, auditors are interviewing taxpayers' adult children and others involved in a partnership for details on how it was set up and run. Officials are sometimes even scrutinizing partners' medical records, or interviewing doctors, to determine if a partnership was improperly created mainly to save taxes by someone on the verge of dying.

The article suggests various ways in which FLPs can be structured to withstand scrutiny. However, at their core these methods all have characteristics that taxpayers forming FLPs often don't want, namely an entity that has an independent business purpose and that is more than an "incorporated pocketbook" for the senior member or members of the family. Once again, the most basic rule of tax law is that "pigs get fat, but hogs get slaughtered."

Hat Tip to The Law Blog.