In our last post, we talked about how the Bipartisan Budget Act of 2015 and what it means for partnerships going forward. The simplification of the auditing process for partnerships was a huge boost for the Internal Revenue Service. It is now much easier for the IRS to audit partnerships, and these businesses must be prepared for this new world when the calendar flips from December 2017 to January 2018.
Before the Bipartisan Budget Act, the Tax Equity and Fiscal Responsibility Act (TEFRA) rules laid out three ways for the IRS to audit partnerships:
- If the partnership had 10 or fewer partners, then each individual partner would be audited.
- If the partnership had 11 or more partners, then the partners would audited in a unified manner outlined in the TEFRA guidelines.
- If the partnership had at least 100 partners, then they could qualify as an Electing Large Partnership (ELP) which would also provide a unified audit that would appear on the current year’s return, not an amended-return from a previous year.
With the BBA’s new partnership tax rules set to take hold next year, these three paths will be eliminated in favor of a centralized, streamlined set of auditing rules for partnerships. One of the key components of all of this is that when a partner or partnership is audited, their “items of income, gain, loss, deduction, credit and partners’ distributive shares” will be reviewed and any adjustments to them could result in an “imputed underpayment.” This underpayment could also be taxed at the highest rate possible, as outlined in our last post.
Source: Bloomberg BNA, “Bloomberg BNA Analysis of the Bipartisan Budget Act of 2015,” Oct. 30, 2015