A partnership tax reform proposal drafted by the House Ways and Means Committee in February 2014 has come back into the news after Mark Warren, Ways and Means majority tax counsel, recently commented on the proposal at a District of Columbia Bar Taxation Section conference.
Over the past year, the GAO and other agencies have released reports noting that the IRS faces significant difficulties auditing TEFRA and electing large partnerships (“ELP”). For example, the IRS often spends months trying to locate the partner representing these partnerships in audit, thus reducing the amount of time and resources the Service can devote to the rest of the audit. Additionally, the IRS must generally pass audit adjustments on to all partners from the audited years, which takes even more time given that many of these partnerships have hundreds or even thousands of partners. Underscoring the inefficiencies the IRS encounters in auditing large partnerships, the GAO found that no partnership that filed as an ELP had its tax return audited and closed between 2007 and 2013.
The Ways and Means committee proposal would repeal the TEFRA audit regime and institute a single set of rules for auditing partnerships. The IRS would pass audit year adjustments on to current year partners and the partnership itself would pay the tax. A partnership could initiate the adjustment for the audited years if it could show that the adjustment would be lower if the IRS considered partner level information from these years. Partnerships with less than 100 partners could choose to opt out of the new audit rules and remain subject to the general audit procedures applicable to individual partners.
Many small and medium partnerships welcome these potential changes because the changes eliminate much of the need for individual partners to amend their returns as a result of a partnership audit. Additionally, the proposal is expected to generate $13.4 billion in revenue over 10 years, partly because the changes are expected to allow the Service to close more partnership audits.