You would think that if a partnership was audited and there was an income adjustment in the millions, that would be really bad news for the partners, but a report just released by the Treasury Inspector General for Tax Administration (TIGTA) indicates that such an adjustment might have no effect at all thanks to an undisclosed "specific tolerance amount". The report recommends that the IRS come up with better measurements of the revenue generated by partnership audits. The IRS responded that resource limitation preclude implementation of some of TIGTA's recommendations. Overall the report might be a bit demoralizing to practitioners who strive to get things right in a fairly complex area. On the other hand, those inclined to play the audit lottery (a violation of AICPA ethical standards by the way) would be cheering if they read this report. Of course, the latter crowd does not include a lot of readers of arcane tax material.
The IRS uniformly applies an assessment tolerance to each partner. Therefore, if the IRS determines that a potential assessment will fall below tolerance, the assessment will not be made. The IRS does not publically release the specific tolerance level.
On occasion, the IRS has been faced with the challenge of securing a settlement agreement at the partnership level because the millions of dollars in adjustments would have resulted in zero taxes after applying the assessment tolerance for taxable partners.
This has become a real strain on the Service, given their short staffing from the constant budget cuts. I know that they are working on building a partnership specialty team, which would be very appropriate approach to more effectively audit complex partnership sturctures. To compound the problem, the TEFRA rules are badly in need of a legislative fix—they just don’t work well, especially in the complex world of multi-tiered partnerships. Having said all of this, I was not aware of any assessment tolerance rules of thumb, but I guess it is not surprising given their limited staffing and need to get the most bang for the buck on the partnership returns that they select for audit.