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Understanding Recent Changes to IRS Partnership Audit Rules

 Posted on February 06, 2018 in Tax Audits

San Jose tax attorney, IRS partnership audit, partnership audits, tax audits, tax lawIn recent months, much of the discussion surrounding tax laws in the United States has focused on the changes made by the Tax Cuts and Jobs Act of 2017. Yet while individuals and businesses should understand how they will be affected by tax reform, they should additionally be aware of recent new rules that govern tax audits.

The Centralized Partnership Audit Regime

Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the Internal Revenue Service (IRS) had certain rules for assessing and collecting taxes for partnerships. Audits of large partnerships, such as hedge funds or private equity firms, required individual audits of every partner. The Bipartisan Budget Act of 2015 (BBA) established a new, centralized audit regime, allowing the IRS to audit partnerships as a whole. This new regime will apply to partnership tax years beginning after December 31, 2017.

New Rules and Regulations

The IRS recently released new regulations describing how the centralized partnership regime will be implemented. Notable rule changes include the following:

  • A partnership must designate a person as a partnership representative who has the authority to act on the partnership’s behalf during an audit. The representative does not have to be a partner, but he or she must have a “substantial presence” in the United States. If a representative has not been designated, the IRS may select a person to serve as the representative.
  • Partnerships with 100 or fewer partners can “elect out” of the centralized audit regime, in which case the partnership will be audited as part of the audit of each individual partner. In these cases, partners can be individuals, C corporations, S corporations, eligible foreign entities, or the estates of deceased partners. Trusts are not a permitted partner of a partnership allowed to “elect out.” Additionally, the partnership must provide Schedules K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to each partner.
  • During an audit, any tax penalties or adjustments will be made at the partnership level rather than following the effects of these adjustments through to the individual partners.
  • Partners have a “consistency requirement”—they must treat adjustment items on their individual tax returns the same as on the partnership’s return.

Contact a San Jose Tax Lawyer

The IRS’s new rules for partnership audits can have a substantial impact on how both partnerships and individual partners handle tax returns and other tax issues. If you have any questions about how these rules affect you, or if you need assistance with a tax audit, John D. Teter Law Offices can provide you with the representation you need to ensure that tax law is being applied correctly. Contact a knowledgeable San Jose, CA tax attorney today at 408-866-1810.


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