IRS Asks for Comments Before Issuing Partnership Audit Rules

By Sally P. Schreiber, J.D.

To aid in implementing the newly enacted partnership audit regime, the IRS on Friday requested that taxpayers send comments on a number of topics regarding the new audit procedures (Notice 2016-23).

The new rules apply to partnership tax years beginning after Dec. 31, 2017, but partnerships can elect to have some of the new rules apply for tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018. The IRS cautioned taxpayers to wait until guidance on this election is issued before making the election, and set a short comment period deadline of April 15, 2016, to enable it to issue the rules sooner so that partnerships can elect to apply the rules early.

The Bipartisan Budget Act of 2015, P.L. 114-74, repealed the TEFRA rules governing partnership audits that had been in effect since 1982 and replaced them with a new centralized partnership audit regime that generally assesses and collects tax at the partnership level. It also replaced the rules that applied to electing large partnerships with these new rules.

Among the rules that apply at the partner level is a rule requiring any partnership adjustments to be paid by the partnership. An exception permits a partnership to elect to have the reviewed year partners (the reviewed year means the partnership tax year to which the adjustment relates) take into account the IRS’s adjustments and pay any tax due as a result.

In another change, the tax matters partner of TEFRA has been replaced with a partnership representative. This representative must be a partner (or other person) with a substantial presence in the United States. The IRS may select any person as a partnership representative if the partnership doesn’t have a designation in effect.

Partnerships that furnish 100 or fewer Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., and whose partners are individuals, corporations (including certain types of foreign entities), or estates can elect out of the new partnership-level audit regime. Special rules determine the number of partners when a partner is an S corporation.

Among the subjects the IRS is asking for comments on are rules for implementing the partnership representative requirement, including whether there should be any limitations on who can be one, how to define substantial presence in the United States, and the designation of a representative by the IRS in cases where the partnership fails to designate a representative or the designation is not in effect.

The IRS has a long list of requested comments on the new rules for making adjustments at the partnership level and the corresponding election out that makes the partners liable for any partnership-level adjustments. It also asks for comments on how a partnership should make an administrative adjustment request, and notices of proceedings and adjustments and other procedural rules that will be necessary to implement the partnership-level audit and adjustment rules.

Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.

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