The New Partnership Audit Rules...Are You Up To Speed?January 10, 2017
Is your partnership up to speed on Congress’ updates to partnership audits? The rules apply to tax years beginning after December 31st, 2017, but planning begins now!
Have you read our blog, “Budget Act Provision could put your Partnership at Greater Risk of an IRS Audit”? In February 2016, Congress introduced some updates to partnership audits and some feel the new rules could put partnerships at greater risk of being audited by the IRS. Though the rules generally apply to tax years beginning after December 31st, 2017, some decisions need to be considered now.
A refresher on the changes...
As our blog points out, the 2015 budget act replaces the TEFRA (the Tax Equity and Fiscal Responsibility Act) partnership audit rules by generally requiring large partnerships to be audited at the partnership level — and for tax adjustments to be made and collected from the partnership.
There are additional changes regarding...
New rules for imputed underpayments
An “imputed underpayment” is the tax deficiency resulting from a partnership-level adjustment with respect to a partnership tax year. The IRS can (under the Act) assess an entity-level tax on an imputed underpayment (typically calculated at the higher of the maximum corporate or individual income tax rate) against a partnership in the adjustment year (i.e., the year a notice of the final partnership audit adjustment (FPAA) is mailed).
The new rules provide that if the audit of a partnership’s 2018 return concludes in 2020 and results in a tax assessment, the tax assessment’s cost will be the responsibility of the partners in 2020, even if the partners in 2020 differ from the partners in 2018.
Can the 2020 partners shift the tax burden to the 2018 partners?
Under the Act partnerships have the option to pass the underpayment adjustment to the partners of the “statement year” (the year the adjustment was furnished). The catch is, partnerships only have the option to elect to push out the payment within 45 days of the notice of an FPAA.
Will there still be a ‘tax matters partner’ under the new regime?
Because TEFRA was repealed and replaced with the new rules, the title of “tax matters partner” was also repealed. The tax matters partner, as the title suggests, handles the partnership in all tax matters and is responsible for preparing and filing tax returns.
Under the new rules, partnerships are required to designate a “partnership representative” that has the sole authority to act on behalf of the partnership. This individual does not have to be a partner.
What should partnerships do to prepare?
The new rules are only effective for returns filed after December 31st, 2017, but that does not mean partnerships should neglect to consider how their businesses will change. A partnership may also elect to apply the new rules to any partnership return for tax years beginning after November 2, 2015 and before January 1, 2018. In considering the implementation and timing of these new rules, partnerships should consider how they will mitigate any potential business and/or tax risks under the new guidance, as well as....
- Assess impact on risk disclosure obligations and financial reporting;
- Draft or amend partnership documents now to factor in the potential impact of the new rules on partnership audit assessments;
- Carry out tax due diligence (in addition to the traditional tax due diligence) when obtaining an interest in a partnership. This should address tax risks specific to partnerships, including the risk attached to not complying with the intricate rules for partnership allocations.
Check out our blog for more information on the impending changes. We are always available to answer your questions, too—just reach out to one of our Tax Services professionals today.