Buried somewhere in the Bipartisan Budget Act of 2015 are provisions which completely change the way the IRS will audit partnership tax returns. To start, let’s look at some of the partnership audit rule changes:
- Old rules: All partners were notified of the audit and were individually assessed for any changes.
New rules: The audits take place entirely at the partnership level and the partnership will be assessed any changes.
- Old rules: Any tax changes were assessed in the year being audited.
New rules: Changes are assessed in the year the audit is completed.
- Old rules: Partnerships designated a “tax matters partner”.
New rules: Partnerships name a “partnership representative”.
Space doesn’t allow for us to discuss these changes in detail. Rest assured that each of these changes will require planning and decision making. For example:
- The new rules allow certain partnerships to elect out of these rules.
- Once an assessment is made, the partnership may elect an alternative payment system where the partnership issues statements to the partners so that the partners pay their share of the taxes owed.
- The partners can file amended returns to reflect their share of the partnership changes and then pay the calculated tax, thereby reducing the amount owed by the partnership.
The primary purpose for these changes is to shift the administrative burden from the IRS to the partnership. The IRS has historically shied away from auditing large partnerships, claiming the work involved in dealing with all of the partners was cost prohibitive. Now, the IRS deals with the partnership representative only. The representative then deals with the partners.
I think the biggest issue is that partnership interests change hands and the assessment at the time of the audit could create some inequities. Typically, a 2018 partnership return won’t be audited until 2020. If assessments are made, the 2020 partners will bear the burden of payment. These may not be the same partners that were in place in 2018.
These changes take effect for all partnership returns filed for years beginning after December 31, 2017. Like all tax laws, I expect to see changes and clarifications between now and then. In the meantime, partnerships should be looking at their agreements and determining if they need amendments. Some of the issues to consider are:
- How/who to elect as partnership representative. This person will have more authority than the tax matters person of the past.
- Adopt provisions to assess partners who have left for tax changes in the years they were partners.
- Should the partnership elect out of these rules? If the agreement doesn’t address this issue, it may be left to the partnership representative.
- Require partners to file amended returns?
- How should tax payments be allocated?
I’m afraid this blog has more questions than answers. Hopefully, future guidance will clear up some of the confusion. As always, consult your tax adviser.
Rick Schultz, CPA