New Partnership Audit Rules from the Bipartisan Budget Act of 2015
In recent years, more large partnerships were being audited but based upon a US Government Accountability Office report of large partnerships (over $100 million and at least 100 partners) noted that audits had more than tripled from 2002 – 2011 but only .8% of such entities were audited compared to 27.1% of comparable large corporations. On such statistics, the Treasury decided to change the methodology of auditing partnerships.
In general, the BBA takes effect for tax years ending in 2018 (the audit period will most likely begin in calendar year 2020 for the 2018 tax filings). In general, the new audit procedures will audit partnerships at the partnership level and have the partnership remit the tax payment.
A partnership representative will be designated by the partnership (if not designated, the IRS has the power to designate) and has the sole authority to bind the partnership for audits and litigation with the IRS. The
An election out of these procedures is available for small partnerships (100 or less partners) on an annual basis. Each partner must be an individual, a C Corporation, foreign entity treated as a C Corporation if it were domestic, an S Corporation, an estate of a deceased partner. The election is annual and must identify all of the partners with the election. The election is made on the annual filing of the partnership’s tax return. If valid, all partnership items are audited on each partner’s separate tax return.
The audit adjustment will be netted for all items of income/gain/loss/expense/credit, etc. and taxed at the highest rate (corporate or individual) for the imputed underpayment. No guidance has been given in regard to the lower rates of tax that are the maximum for certain items of income such as long term gains and qualified dividends. Guidance in this area will be forth coming. In addition, there are other issues that arise such as tax exempt entities, treaty rates, etc. that will need guidance in the future. An interest rate 2% above the normal underpayment interest rate will be charged on any imputed underpayment. Guidance is needed in regard to if there is no imputed underpayment (refund).
The partnership may elect to have the partners pay the tax in lieu of the partnership. Such election is made within 45 days of receiving the notice of final partnership adjustment with the imputed underpayment. Each partner then will need to recalculate and review each year post audit and make adjustments accordingly. This method is good for illiquid/cash-strapped partnerships.
These procedures may be adopted as of the date of enactment, but with a little guidance, many partnerships will await the regulations forthcoming in the next two years that should answer many unknown questions.
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Robert S. Schachter, CPA, Partner T (212) 751-9100 [email protected] View Experience
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