United States

Getting the partnership audit rules up and running

ARTICLE  | 

This Tax Notes article, by RSM Principal Don Susswein and Ryan C. McCormick of the Real Estate Roundtable, explains the practical issues the IRS will face in implementing the new partnership audit rules enacted by the Bipartisan Budget Act of 2015, and suggests a number of ways the IRS could resolve them with regulations or other IRS guidance. The new rules, also known as the Partnership Audit Simplification Act of 2015, will replace the TEFRA audit rules that have been in place for over 30 years. The new rules will apply to tax years after 2017. Millions of partnerships, partners, and partnership managers will be affected by the way the issues are resolved by the IRS.

Particular attention is given to the provisions of section 6226 of the Internal Revenue Code, which allow an audited partnership to pass-through the tax liability for any audit adjustments to its partners, and indirect ultimate partners in the case of a multiple-tier partnership arrangement. The article addresses how partnership representatives, a new concept that replaces the “tax matters partner”, should be appointed, identified, and replaced. It also addresses how to deal with partnerships that are audited after they terminate or liquidate, how to provide information that must be furnished to former partners, and how to deal with multiple tier partnerships. 

The article, which is based on comments filed by the authors with the IRS on this topic, also suggests a number of areas where Congress may wish to consider clarifying or correcting some of the underlying statutory language.  This includes addressing the treatment of multiple tier partnerships, clarifying how information must be furnished by partnerships to partners, and addressing cases where an audit reveals that a partner has overpaid taxes.  

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