The IRS recently released new proposed regulations designed to significantly change the rule under which an audit of a partnership can occur. The reason for the changes is it makes it significantly easier and less costly for the IRS to conduct an audit and enforce rulings where appropriate. The new audit regime was originally enacted as part of the Bipartisan Budget Act of 2015 effectively replacing the existing rules enacted under the Tax Equity and Fiscal Responsibility Act (TEFRA).
The proposed regulations create a new structure for determining, assessing and collecting taxes from adjustments that occur because of a partnership audit. Other changes include partnership audit representation, calculation of imputed payments and new push-out rules. Although these are only proposed regulations it is expected they will be implemented with only minor changes. To help clients, prospects and others understand the changes and how their partnership could be impacted, Smith Schafer has provided a summary of key points below.
The proposed regulations require a partnership name a representative who will be required to act as a liaison between the IRS and partnership in the event of an audit. Under existing rules, the Tax Matters Partner (TMP), had to be a partner in entity undergoing the audit while non-partners were forbidden from filing that role. However, the proposed regulations allow any person, including a non-partner, to serve as a partnership representative. The most meaningful change is that the Partnership Representative (PR) has the authority to enter into binding agreements with the IRS. This means the PR can make serious decisions that not only impact the partnership, but individual partners as well.
As outlined above any person can serve as the partnership representative provided they have a substantial presence in the US which includes:
- The ability and opportunity to meet with the IRS in the US at a reasonable time and place as agreed to by both parties
- Must have a physical address and phone number where they can be reached during normal business hours
- Must have a U.S. taxpayer identification number
It is important to note there are special conditions under which an entity can be appointed as a PR, but the IRS appears to want individuals appointed for most cases.
Expanded Tax Collection
The proposed regulations provide greater opportunity for the IRS to assess and collect taxes from partnerships. Under existing IRS rules any tax which comes from adjustments to income, gain, loss or deductions must be determined at the partnership level. The regulations interpret this to mean all information shown on a partnership return of other firms for the table year. This includes partner capital accounts, partnership liabilities, timing and source of partnership activities, partnership’s basis in assets including type and value and the timing, source and amount of the partnerships gain, loss, deductions and tax credits. Self-employment taxes, foreign withholding taxes and tax on foreign accounts are excluded from these rules. It is important to note objections to penalties and fines must be raised by the PR prior to IRS final determination to have them put under consideration for waiver.
Push Out Election
Under the proposed regulations, a partnership can “push out” adjustments to its partners rather than make the tax payment at the partnership level. When this election is made there is a brief period where the partnership needs to provide partners with an allocation of gain, loss, deduction and credit among the partners. The IRS requires a safe harbor tax, which includes interest and penalties, to be calculated and collected from each partner. Impacted partners can pay this tax rather than re-calculating taxes due in year under audit.
It is expected the proposed regulations will become final before the end of 2017, although the regulations have not yet been made final by the IRS. If approved, it is expected the new rules will go into effect for tax years beginning after December 31, 2017. If you have questions about the proposed regulations or how it will impact your situation, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.