Dana Bull, CPA •
The Bipartisan Budget Act of 2015 (BBA) included new partnership audit rules which change the way partnerships are audited by the IRS. The BBA rules, which are generally effective for partnership taxable years beginning after December 31, 2017, will change significantly the procedures for partnership audits. These rules, known as the centralized audit regime, are intended by Congress to streamline the process by which the IRS can audit partnership tax returns and collect any resulting tax.
The Bipartisan Budget Act of 2015 (BBA) included new partnership audit rules which change the way partnerships are audited by the IRS. The BBA rules, which are generally effective for partnership taxable years beginning after December 31, 2017, will change significantly the procedures for partnership audits. These rules, known as the centralized audit regime, are intended by Congress to streamline the process by which the IRS can audit partnership tax returns and collect any resulting tax.
To facilitate the IRS’s ability to conduct an examination of a partnership, the BBA rules require each partnership to designate one ‘partnership representative’ to serve as the sole point of contact between the partnership and the IRS. Unlike the “tax matters partner” under the current rules, the partnership representative need not be a partner. In contrast to the existing partnership audit rules, partners in partnerships subject to the BBA rules will have no statutory right to participate in tax audits or litigation, no right to opt out, and no partner-level defenses. Only the partnership representative will exercise these rights. Choosing your partnership representative should be a thoughtful process so that you are appropriately represented.
Under the default BBA rules, tax on any adjustment that results in an increase to a partnership’s income is assessed on and collected from the partnership. This will shift the burden of payment onto current partners, rather than those who were partners during the year under audit. Also, the tax will be assessed at the highest federal income tax rate, regardless of the potentially lower rates that may otherwise apply if the tax burden had been paid by those who were partners during the year under audit.
If you don’t like the sound of these new partnership audit rules, beside the default rules explained above, the partnership can choose from two additional alternatives:
Elect out of the new rules - Partnerships that issue 100 or fewer Schedules K-1 and that have only individuals, corporations or estates as partners may elect out of the new audit rules. However, partnerships that have partnerships, trusts, disregarded entities, or nominees as partners cannot use this election. This election is made annually with a timely filed tax return. This election most closely matches the superseded rules but it is limited only to certain partnerships.
Make a “push-out election” - Under this alternative, instead of the partnership paying the assessed tax deficiencies resulting from an audit, a partnership may elect to provide a statement of each partner’s share of audit adjustments to (1) each partner of the partnership for the year under audit and (2) the IRS. Each partner would then determine the additional tax owed as if the adjustments had been properly reported in the year under audit. This election must be made no later than 45 days after the date of the notice of final adjustment is received from the IRS.
Each election will result in very different outcomes and each carries its own pros and cons. If you have any questions on how the new partnership audit rules could impact you please contact your tax advisors at Mason + Rich, PA.
Under the default BBA rules, tax on any adjustment that results in an increase to a partnership’s income is assessed on and collected from the partnership. This will shift the burden of payment onto current partners, rather than those who were partners during the year under audit. Also, the tax will be assessed at the highest federal income tax rate, regardless of the potentially lower rates that may otherwise apply if the tax burden had been paid by those who were partners during the year under audit.
If you don’t like the sound of these new partnership audit rules, beside the default rules explained above, the partnership can choose from two additional alternatives:
Elect out of the new rules - Partnerships that issue 100 or fewer Schedules K-1 and that have only individuals, corporations or estates as partners may elect out of the new audit rules. However, partnerships that have partnerships, trusts, disregarded entities, or nominees as partners cannot use this election. This election is made annually with a timely filed tax return. This election most closely matches the superseded rules but it is limited only to certain partnerships.
Make a “push-out election” - Under this alternative, instead of the partnership paying the assessed tax deficiencies resulting from an audit, a partnership may elect to provide a statement of each partner’s share of audit adjustments to (1) each partner of the partnership for the year under audit and (2) the IRS. Each partner would then determine the additional tax owed as if the adjustments had been properly reported in the year under audit. This election must be made no later than 45 days after the date of the notice of final adjustment is received from the IRS.
Each election will result in very different outcomes and each carries its own pros and cons. If you have any questions on how the new partnership audit rules could impact you please contact your tax advisors at Mason + Rich, PA.
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