Budget deal rewrites partnership audit rules

Tax Hot Topics:Rewrite of partnership audit rulesThe president on Nov. 2 signed a sweeping budget compromise into law that will replace the current partnership audit procedures with a new process that dramatically increases the payment and reporting responsibilities for partnerships.

The partnership provisions will profoundly affect not only pass-through entities, but also S corporations, C corporations and tax-exempt entities that are partners in partnerships. Under the previous law, a partnership subject to the rules under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) would determine any adjustments at the partnership level, and assessments would flow through to the partnership’s partners. This procedure enabled the IRS to prevent partners from being treated unequally. However, it also required the IRS to locate and calculate the tax owed for each partner. Some large partnerships have thousands of partners.

The new law, enacted under the Bipartisan Budget Act of 2015 (P.L. 114-74), still makes adjustments at the partnership level, but requires partnerships to either (1) pay any imputed underpayment on behalf of its partners or (2) issue new information reports to the partners and to the IRS indicating the portion of the imputed underpayment for each partner.

The legislation also gives the IRS and Treasury considerable deference to enact rules and regulations to implement and interpret the new law, which is effective for partnership taxable years beginning after Dec. 31, 2017. Although the law allows partnerships to apply it sooner, the IRS and Treasury haven’t yet issued any guidance on early adoption of the law.

Our Tax Legislative Update includes a full discussion of the new partnership audit provisions.

David Auclair
+1 202 521 1515

Shamik Trivedi
+1 202 521 1511

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