The Bipartisan Budget Act of 2015 (The Act) set into motion significant changes to the rules regarding IRS audits of partnerships. The Act repealed the partnership audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), and it largely overhauls the way in which the IRS audits and collects federal income taxes from partnerships.
While the changes do not go into effect until 2018, entities that are identified as “partnerships” under the tax code, need to be aware of, and prepare for these changes. Basically, the new law allows the IRS to impose taxes at the partnership level, rather than “passing through” adjustments to the individual partners.
The New Rules and Asset Allocation for Partnerships
Even though the law does not take effect until 2018, if you are a partnership, it has repercussions even now. Basically, The Act significantly changes the allocation of assets, and will likely have a considerable impact on the way partnership interests are evaluated, allocated, and protected. If you are a partnership, you need to start planning now to ensure your interests are properly protected.
One of the most significant changes from TEFRA deals with taxation of underpayments following “partnership adjustments.” The general rule is that the partnership will pay the imputed underpayment at the highest tax rate in effect for the year under review including interest and penalties. If a partner amends their tax return and pays what’s owed based on a “partnership-level” adjustment, the partnership’s imputed underpayment is reduced accordingly for the adjustment year. There are also special rules that allow adjustments for imputed underpayment that are related to tax-exempt partners and C-corporation partners.
The new law also allows for the election of a “push-out” option which shifts the burden of adjustment and payment to the partners, as opposed to the “partnership” who would then be responsible for paying his or her proportional share of the imputed underpayment, along with any penalties and interest.
Who is Affected by the New Rules?
The new partnership audit rules apply to all partnerships. However, some smaller partnerships may “opt-out.” Partnerships with 100 or fewer partners may choose to opt out if each of the partners is an individual, a C corporation, an S corporation or an estate of a deceased partner. Even if your entity meets the eligibility criteria for electing out of the new audit regime, the opt-out process is complicated.
Compliance with The Bipartisan Budget Act of 2015 will require substantial changes in tax planning for partnerships, and in the drafting of partnership agreements. Given that the new law will make it easier to conduct partnership audits, it is reasonable to assume that the agency will be increasing its number of IRS audit examinations for partnerships.
MBAF can be instrumental in reviewing your partnership, assessing your qualification to “opt-out,” and in otherwise ensuring you are in compliance with the new IRS partnership audit rules.
Understanding the Bipartisan Budget Act of 2015 and how it applies to partnership audits can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.