New Partnership Audit Regime Now Effective
Most eyes have been on the implications of the tax reform signed into law last December, but it’s not the only tax legislation to introduce significant changes. The Bipartisan Budget Act of 2015 changed how partnerships were to be audited, and those changes are now effective this year.
Why Is This Happening?
The Bipartisan Budget Act of 2015 changed the partnership audit regime that had been in place since Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which had been in place for three decades. It is generally understood that over time the number of partnership audits performed under TEFRA decreased more and more due to the unworkability of the rules. This new law is expected to dramatically increase the audit rate of partnerships.
What Do I Need to Know?
Some highlights of the new audit regime are:
- Audits will take place at the partnership level. This means that the partnership itself is liable for any interest, penalties, deficiencies, etc. This has a number of implications, one of them being the partnership will be directly responsible for imputed underpayment unless it makes a push-out election, in which case the reviewed year (see below) partners are responsible.
- Partnerships must designate a representative, which takes the place of the former TEFRA “Tax Matters Partner.” This new “Partnership Representative” doesn’t have to be a partner but must have the ability to bind the partnership and partners to any audit result. There are other criteria and responsibilities, but it is a different role than the one outlined in TEFRA.
- There are some new terms to know, such as “reviewed year” (year being audited), “adjustment year” (year during which audit assessment is made final).
- Partnerships with 100 or fewer partners may opt out, provided they meet certain criteria. For example, to qualify for opt out, the partners must be individuals, C-Corps, S-Corps, or estates of deceased partners. Other entity types – such as disregarded entities, trusts or partnerships – do not qualify.
What Do I Need to Do?
In light of these changes – and if you haven’t already done so – we are strongly urging all our clients to be in conversation with their legal counsel to go over how this legislation affects their partnership and LLC agreements.