New Centralized Partnership Audit Regime Takes Effect

In late 2015, Congress passed the Bipartisan Budget Act of 2015 (as amended, the “BBA”). The BBA established a new centralized partnership audit regime, applicable to partnership tax years beginning after December 31, 2017, and repealed prospectively the TEFRA partnership audit rules. These new federal partnership income tax audit rules will have significant implications for partnerships (and multi-member limited liability companies) and their partners.

In January 2017, the IRS issued proposed regulations (reissued in June 2017) that implement the BBA’s centralized partnership audit regime. With the exception of final regulations published January 2, 2018 that implement rules related to “opting out” of the new audit rules (as explained in more detail below), the proposed regulations have not been finalized.

The new audit rules apply to all partnerships and to entities that elect for income tax purposes to be treated as partnerships (i.e., multi-member limited liability companies). As explained below, certain small partnerships (100 or fewer partners) that have only “eligible partners” can elect to opt out of the new audit rules.

For those partnerships that do not opt-out, the IRS will audit a partnership’s tax items and the partners’ distributive shares for a particular year, and any resulting adjustments will be made at the partnership level and taken into account by the partnership in the year the audit or judicial review is completed. If an audit results in a tax deficiency, the “imputed underpayment” will be assessed against and collected from the partnership rather than the individual partners, unless the partnership makes a “push-out” election, as described below. One big effect of the new audit rules is that they shift the burden of payment onto current partners, rather than those who were partners during the year under audit. Also, subject to possible modification, the tax is assessed at the highest federal income tax rate, regardless of the potentially lower rates that may otherwise apply…

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Whalen J. Kuller is a Partner at Hartman Simons & Wood LLP. For further information, he can be reached at (770) 951-6586 or whalen.kuller@hartmansimons.com.