The IRS audit rules for partnerships continues to evolve and change. In the fall of 2015 Congress passed the “Bipartisan Budget Act” that contained changes to the audit process for partnerships that goes into effect January 1, 2017. The old IRS audit rules for partnerships was based primarily upon the size of the partnership. If there were 10 or fewer partners, the group was considered a “small partnership.” The IRS audited these on an individual taxpayer level. Larger partnerships (up to 100) were governed by the Tax Equity and Financial Responsibility Act or TEFRA. TEFRA mandated that audits were conducted at the partnership level, but any adjustments in these audits had to be collected from the partners themselves. If there were more than 100 partners, the partnership could elect to be treated as Electing Large Partnerships or ELPs, with audit results posted to current year returns of partners (instead of requiring an amended return from the prior year. The IRS has simply faced a difficult challenge with larger partnership audits, and the new changes are intended to make it easier for the IRS to do so.
TEFRA and ELP audit rules have been replaced by a new single audit procedure based upon the Bipartisan Budget Act. The “tax matters partner” will now be designated as the “membership representative.” The IRS now has the power to collect imputed underpayment or tax liabilities arising from IRS audit rules for partnerships from the actual partnership itself, instead of pursuing individual partner amendments and payments. It is important to note that adjustments will be calculated at the highest rate of tax for US individuals (39.6% today). The partnership may be able to avoid this by issuing an ammended Schedule K-1 however this alternative procedure is quite complex from a legal, tax and accounting perspecitive.
Allen Barron is uniquely positioned to help your organization to apply the new IRS audit rules for partnerships. Our experienced IRS audit attorneys, backed by our tax preparation, accounting and legal personnel provide a single source partner for your partnership’s legal, accounting and tax requirements. We invite you to contact us or call 866-631-3470 for a free consultation.