New IRS Partnership Audit
Rules—2018
By Erik Weinapple
Background
On November 2, 2015, the Bipartisan Budget Act of 2015
(the “Budget Act”) was enacted, which contained major
changes to the partnership tax audit process. Under the
Act, the IRS will now audit specified partnerships and
collect tax attributable to any adjustments directly from
the partnership, as opposed to pursuing the partners.
These new rules are effective for tax years beginning in 2018
and are applicable to all entities treated as partnerships
for federal income tax purposes. Members and investors
will be significantly impacted by the new audit rules and
affected partnerships should carefully consider making
changes to their governing documents.
Previous Audit Regime
Under the old law, enacted by the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”), the IRS had the
burden of recalculating the tax liability of each partner in
a partnership for the particular year subject to audit. The
TEFRA regime passed through any audit adjustments to
the partners in the year under review.
The New Budget Act Regime
The new Budget Act repeals the TEFRA Rules, replacing
them with a new partnership audit regime which is
applicable to all partnerships meeting the following
criteria:
Applies If:
• MORE than 100 members OR
• Partnership, Trusts, Disregarded Entities are
members
10
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May Elect Out If:
• LESS than 100 partners AND
• Only “Eligible Members” (i.e. Corporations,
Individuals, Estates)
• The option to elect out is made annually on a
timely filed tax return
The new rules permit the IRS to impose a federal tax
liability directly on the partnership.
• The partnership has the obligation to pay the tax
deficiency, plus penalties and interest.
• Tax would be computed at the highest individual
or corporate tax rate in effect for the year under
examination.
• The partnership may be able to reduce its tax
liability by providing a calculation to the IRS that
some of its members are tax-exempt or are subject
to lower tax rates.
On March 23, 2018 the Tax Technical Corrections Act
of 2018 was signed into law which provided a “Pull-
in” procedure whereby the partnership could propose
partnership adjustments to the reviewed year members
without the need for amended returns to be filed.
Another option exists known as the “Push-out” method
which essentially is the same as the Pull-in procedure,
but requires members to amend their returns. Choosing
the Push-out method comes with an added penalty.
“Tax Matters Partner” is replaced with a “Partnership
Representative” which may be a partner or other
person with substantial presence in the United States.
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