The Bipartisan Budget Act of 2015 modifies the way that the IRS will conduct partnership examinations, with new provisions that repeal TEFRA and Electing Large Partnership (ELP) rules.
Unless taxpayers elect into the new regime early, the new rules take effect January 1, 2018. The changes provide that adjustments made during audit will be paid at the partnership level. This is a dramatic change from the former method of looking to each partner to pay the additional tax. Also of note, the additional tax will be paid at the highest individual tax rate in the year of the examination and not for the tax year in controversy. This obviously may have a significant impact if partnership interests are transferred.
This change is attempting to ease the IRS’ administrative burden, but will result in partnerships needing to address several new issues in their partnership agreements. For instance, the “Tax Matters Partner” has been eliminated and replaced by a new “Partnership Representative” whose rights and responsibilities differ significantly from the old laws. The Partnership Representative does not have to be a partner and will bind the partnership in all dealings with the IRS. Additionally, the concept of “notice partner” has been eliminated, and a partner may no longer bring individual disputes or claims. The statute of limitations for partnership examinations will now be based solely upon the partnership filing.
Within the new statute, smaller partnerships may be able to elect out of the new regime all together. This election must be made each year on a timely filed return. The partnership may also elect after examination to have the underpayment made at the partner level and take into account partner marginal rates. Additional details are forthcoming in regulations and potential technical corrections.
These new laws pose multiple decision points for partnerships and are significant changes to tax procedure. Partnerships and their advisors will need to be aware of the new provisions and make necessary modifications to existing partnership agreements and partnership transactions.