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States ask the IRS to Clarify New Partnership Audit Rules

The “Multistate Tax Commission” adds their voice to the discussion as states ask the IRS to clarify new partnership audit rules and how assessments and adjustments at the entity level will affect how income will be impacted at the state level.  The Commission wrote a letter to the IRS requesting clarification of IRS audit procedures for partnerships and LLCs who elect to conduct business as a partnership for tax purposes.  The letter stated:

“Adapting to the new regime presents challenges for the states, just as it does for the IRS, taxpayers, and practitioners,” wrote the Multistate Tax Commission (MTS). “But much of the difficulty is inherent in the pass-through tax system and in complex partnership structures.”

According to the Tax Commission the “pass-through” business sector has experienced tremendous growth.  The majority of entities in the United States are pass-through entities.  Entities such as an LLC, partnership or S Corporation are designed to pass through net income to taxpayers when compared to a C Corporation.  The concern of the IRS and the MTS is the potential for abuse and in some cases fraud relating to income distribution and reporting for these entities and the individual partners, members or shareholders who benefit from them.  “We support IRS efforts to effectively implement the new regime, therefore, which will also benefit the states; while we also hope to avoid undue administrative and compliance burdens.”

The MTS concerns echo those mentioned in a letter from the American Institute of CPAs (AICPA) a week ago which included multiple recommendations associated with the IRS’ proposed regulations.

When states ask the IRS to clarify new partnership audit rules and pass-through entity audit procedures alarm bells should be ringing in their owner’s ears.  If the states are concerned about “administrative and compliance burdens” based upon the new IRS partnership and passthrough entity audit guidelines, how concerned should the partners, members or shareholders who own these entities be?

Allen Barron provides integrated tax, legal, business advisory and accounting services to pass through entities and their ownership.  We are able to provide insight into these issues from a much broader perspective.  This is not simply a tax or accounting issue, it may impact the very structure of your entity and how you conduct business in the future.  We invite you to contact us for a free consultation at 866-631-3470.