WASHINGTON, D.C. – U.S. Senators Marsha Blackburn (R-Tenn.), John Barrasso, M.D. (R-Wyo.),Steve Daines (R-Mont.), and James Lankford (R-Okla.) urged the U.S. Department of the Treasury to review the Biden administration’s harmful Internal Revenue Service (IRS) pass-through compliance unit that has been operating within the Large Business and International (LB&I) division. It appears the pass-through compliance unit, established by the Biden administration, was motivated by ideology rather than principles of sound tax administration.  

Pass-Through Entities Are the Bulk of Main Street Businesses That Serve as Backbone of Our Economy

“Pass-through entities form the bulk of Main Street businesses across the country. This includes countless family businesses, professional services firms, and real estate ventures that serve as the backbone of our local economies. Taxpayers have the lawful right to choose these structures for benefits like liability protection, operational flexibility, and simplified tax filing. The creation of an enforcement unit specifically focused on pass-through entities raises legitimate concerns about whether the focus is on improving compliance or simply targeting specific business structures based on institutional prejudice.” 

Audits Are Particularly Challenging for Smaller Businesses to Navigate

“This type of targeting is problematic no matter the size of the business, but is especially challenging for smaller businesses who have fewer resources to navigate such audits. In particular, the IRS's October 2024 announcement about the unit stated that, going forward, ‘LB&I will be responsible for starting pass-through exams, regardless of entity size’ and touted ‘removing the entity-size barrier’ as a means to increase audit rates. This shift subjects small businesses traditionally handled by the Small Business/Self-Employed (SB/SE) division to LB&I's complex examination procedures designed for sophisticated taxpayers. Most American small businesses lack the resources to navigate these intensive audits, creating disproportionate compliance burdens despite prior assurances that taxpayers under $400,000 would not face increased enforcement relative to historical levels.”

Under this Program, IRS Could Unfairly Target Legitimate Business Structures

“The IRS's news release also referenced targeting ‘complex arrangements’ without providing clear definitions, creating the impression that legitimate business structures could be unfairly targeted based on their legal structure rather than actual compliance risk. Even more concerning, the announcement explicitly states that the bureaucratic changes were designed primarily to ‘achieve its goal of increased audit rates in this complex area’ rather than to address legitimate compliance concerns derived from an evidence-based risk assessment. This focus on increasing audits rathe than improving compliance suggests an agenda-driven approach to enforcement.”

Click here to read the full letter.