New Partnership Centralized Audit Regime
The 2015 Bipartisan Budget Act (BBA) repealed the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership audit procedures. These new rules are effective for returns filed for tax years beginning after 2017. Under the old rules, after an IRS audit of a partnership return, any adjustments to partnership tax items would then flow through to the partnership's partners, and the IRS would assess deficiencies against and collect them from the applicable partners. Under the new approach, adjustments to a partnership's items of income, gain, loss, deductions, and credits will be made at the partnership level. Any additional tax, penalty, or other amount related to the tax will also be determined and collected at the partnership level unless the partnership elects the alternative process known as a push-out election.
Push-out election. If a partnership is assessed an underpayment for one or more reviewed years, it can elect out of making the tax payment if it furnishes to each partner who was in the partnership in the year under audit and to the IRS, a statement of the partners' share of any adjustments made by the IRS within 45 days of the final IRS report. Those partners would then make the changes and pay the additional tax, penalties, and interest on their personal tax returns.
Election out of the new rules. Eligible partnerships with 100 or fewer eligible partners can elect out of the new audit rules for any tax year. If the election out is made, the partnership and its partners will be audited under the general rules for individual taxpayers. Generally, the election out is only available for partnerships in which the partners are eligible and include:
- C or S corporations,
- foreign entities that would be treated as C corporations if they were domestic, and
- estates of deceased partners.
Partnership with owners other than the listed above will not be able to elect out of the new rules.
Under the new rules, partnerships will designate a partnership representative (PR). The IRS will no longer send correspondence about any audit proceedings to the partners. Instead, the PR will receive all correspondence and will have broad authority to bind the partners.
Taxpayer circumstances can vary greatly and not all relevant details can be included in a single article. While we do hope it has been informative, this article is not intended to be tax planning advice. If your firm would like assistance, please contact our office (225) 927-6811; however, you should contact your attorney to see if you should amend your current operating agreement.