This summer, the IRS re-issued proposed regulations to create a centralized partnership audit regime.
Originally enacted as part of the Bipartisan Budget Act of 2015, these new rules are designed to make it easier and less costly for the IRS to audit partnerships. The proposed rules will repeal existing partnership audit and adjustment rules enacted under the Tax Equity and Fiscal Responsibility Act (TEFRA) and create new ones for determining, assessing and collecting taxes from adjustments that result in the audit of a partnership. It also mandates the designation of a partnership representative (PR), expands the type and amount of taxes that can be collected in partnership proceedings, identifies how to calculate imputed underpayments and outlines “push out” rules. To help clients, prospects and others learn more about the proposed regulations and potential impact on their situation, Hanson & Co. has provided a summary of key facts below.
The proposed regulations require that a partnership name a representative who will be required to act as a liaison between the IRS and the partnership for all communications and in the event of an audit (the Partnership Representative or PR). Under existing rules, the Tax Matters Partner (TMP) had to be a partner in the 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 PR can also be an entity if they meet qualification criteria, but one individual from that entity must still be identified as the liaison. The most meaningful change is that the PR has the authority to enter into binding agreements with the IRS on behalf of the partnership, including whether an audit adjustment should be reconciled at the partnership level or by individual partners. This means that they can make serious decisions that not only impact the partnership, but individual partners as well. As part of the new rules, individual partners also lose their right to participate in partnership-level proceedings.
As outlined above any person can serve as the partnership representative provided they have a substantial presence in the U.S., which includes:
- The ability and opportunity to meet with the IRS in the U.S. at a reasonable time and place as agreed to by both parties
- A physical address and phone number where they can be reached during normal business hours
- A U.S. taxpayer identification number
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 that 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 for the tax year. This includes partner capital accounts, partnership liabilities, timing and source of the partnership activities, the partnership’s basis in assets, including the type and value and the timing, source and amount of the partnership’s gain, loss, deductions and tax credits. Self-employment taxes, foreign withholding taxes and taxes on foreign accounts are excluded from these rules. It’s important to note that objections to penalties and fines must be raised by the PR prior to the IRS final determination to have them considered for a waiver.
Push Out Election
Under the proposed regulations, a partnership can “push out” adjustments to its partners rather than making the tax payment at the partnership level. When this election is made, there is a specified timeframe for the partnership 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 the year under audit.
In the rare event that the IRS has determined that the partnership has ceased to exist (due to no longer engaging in active business or being unable to pay taxes), then an automatic push out goes into effect. When this happens, the partnership must furnish statements to all partners indicating their shares of the adjustment for tax payments and other purposes.
The proposed regulations are expected to become final before the end of 2017, and the effective date for the new regulations will apply for partnership tax years after December 31, 2017. The impact on partnerships and tiered partnerships will be significant. If you have questions about the changes or would like assistance with a partnership issue, Hanson & Co. can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon