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The Bipartisan Budget Act of 2015: New Partnership Audit Rules

November 10, 2015

Author: Meghan Dunshee, Senior Tax Manager at LGT
 
The Bipartisan Budget Act of 2015 signed into law on November 2, 2015 has gathered a lot of attention lately for its purpose to help the U.S. government avert financial obligations by raising the discretionary spending limit. However, there are several other important pieces of this legislation of which to take note. Under this act, one of the government’s goals is to simplify the rules for auditing partnerships and ease the administrative burden of performing the audits along with collecting any additional tax that may result.
 
Currently, the IRS has three different sets of rules for auditing partnerships. In general, the set that applies to a particular partnership depends on:

  1. how many partners and
  2. what “kind” of partners (individual, corporation, S corporation, etc.) the entity has.

 
 
Congress previously tried to streamline the examination procedures of partnerships in the Tax Equity and Fiscal Responsibility Act of 1987 (TEFRA). Under TEFRA, the IRS examines a partnership for a specific year to make adjustments at the partnership level. The changes are then passed down to the partners who are responsible for their share of any additional tax due. Audits under TEFRA can be complex and collecting tax from the partners on increases to income can be difficult.
 
The new law scrapped TEFRA in favor of a single set of rules. Under the current rules, the IRS would examine the partnership return for a particular year (the “reviewed year”). However, any changes would be taken into account by the partnership in the year that the exam was completed (the “adjustment year”). Moreover, any additional tax would be collected from the partnership, unless partners voluntarily amend their return for their share of the changes. Certain partnerships with 100 or fewer partners may opt out of these rules; though, opting out does require an affirmative action on the part of the entity. The rules under the new act are applicable to partnership returns for tax years beginning after 2017.
 
The services of a legal or tax advisor should be sought before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt, PLLC, call 214.871.7500 or email at askus@lgt-cpa.com.

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