Tax Strategy
 

Tax Strategy

A ‘first look’ at the new partnership audit rules

On November 2, President Obama signed the Bipartisan Budget Act of 2015 into law. Along with purely budget-oriented matters, a revenue-raiser in the form of radically new partnership audit rules suddenly slipped into the mix and became part of final enacted legislation. Not even a month earlier, these partnership provisions were still considered in their formative stage … until someone saw that they could quickly provide almost a $10 billion offset that helped facilitate the budget deal.

As a nod to the hurried insertion of these new partnership rules into the Tax Code, Congress provided for a delayed effective date. Further, some members expressed the expectation that Internal Revenue Service guidance and possible technical corrections would help smooth out remaining concerns before mandatory implementation is triggered for partnership tax years starting after Dec. 31, 2017. Nevertheless, partners and partnerships would do well to consider strategies under these new audit procedures earlier than this 2018 effective date.

The new law moves as close as possible to imposing an entity-level tax on a pass-through entity. This is accomplished by essentially providing for partnership audits, from which tax adjustments will be assessed at the partnership level. Although the stated purpose of the new law’s partnership audit provisions is to make it easier for the IRS to audit large partnerships, including multi-tiered structures and hedge/private equity funds, even smaller partnerships will feel the impact.

BACKGROUND

Before introduction of the revised partnership rules within the Tax Equity and Fiscal Responsibility Act of 1982, partnership returns generally were audited as adjuncts to the audits of partners’ returns. Since the individual partners’ returns were separately audited, any given partnership item could be subject to separate administrative procedures and possibly inconsistent treatment.

TEFRA introduced procedures where the partnership itself would be audited, and adjustments made at the partnership level would flow through to the returns of the individual partners. These rules were further supplemented, notably in the form of an Electing Large Partnership procedure by the Taxpayer Relief Act of 1997. Nevertheless, coordinating audits and pursuing individual partners following a partnership adjustment proved to be a growing problem, particularly as partnerships expanded to become the entity of choice for many businesses and investors. Read more on Accounting Today.