The Bipartisan Budget Act of 2015 (BBA) significantly changed the way the IRS will audit partnerships. The Act repeals the current partnership audit rules (TEFRA and ELP) and replaces those with new rules that will most likely increases partnership audit rates. The rules take effect for tax years beginning after December 31, 2017.
- Under the old rules, when a partnership was audited, the adjustments made by the IRS were carried down to the individual partner returns to determine tax due. With the new rules, any audit adjustments will result in tax being imputed at the partnership level and the partnership would pay the tax, interest and penalties. This could result in inequities if partners have gotten in or out of the partnership between the year being audited and when the tax is being paid.
- Also, the tax matters partner has been done away with in favor of a partnership representative. The “PR” would be the sole contact for dealing with the IRS during an audit. This eliminates participation by partners during the audit. Partners should be discussing who this individual should be and updating operating agreements to reflect that.
- Small partnerships (less than 100 partners) meeting certain requirements will be able to ‘check the box’ on their Form 1065 to elect out of the new rules. Most of our partnership clients will fall into this category so when the time comes we will be discussing with you whether or not we want to elect out.
Of course these rules are more extensive than the few changes mentioned above. The IRS is in the process of releasing a complete set of final regulations so as more concrete details emerge we will pass those on. Please feel free to reach out to one of our tax professionals with additional questions on this matter at 859-331-1717.
