On June 13, proposed regulations implementing the partnership audit regime enacted by the Bipartisan Budget Act of 2015 were issued. These rules modify the way that the IRS will conduct partnership examinations while repealing TEFRA and Electing Large Partnership (ELP) rules.
Although the new rules take effect January 1, 2018 now is the time to consider the impact on partnership agreements and to make amendments. The changes provide that adjustments made to a partnership during audit will now have taxes paid at the partnership level. This is a dramatic change from the former method of looking to each partner to pay the additional tax. Importantly, the additional tax will be paid at the highest individual tax rate in the year of the examination (adjustment year) and not for the tax year in controversy (reviewed year). This may have a significant impact if partnership interests are transferred. Partnerships will now have a stronger interest in maintaining the ability to communicate with former partners.
The change is attempting to ease the IRS’ administrative burden, but will result in a partnership’s need to address several new issues in their partnership agreements. For instance, the “Tax Matters Partner” under TEFRA has been eliminated and replaced by a new “Partnership Representative” whose rights and responsibilities differ significantly. 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. These new laws pose multiple decision points for partnerships including certain elections and handling tiered structures that are significant changes to tax procedure. All new partnership agreements should include provisions for the new statute, but strong consideration should be given to amending existing agreements. Now is the time for partnerships and their advisors to be discussing the new provisions and to make necessary modifications to existing partnership agreements and partnership transactions.
Please contact Steven Miller, alliantgroup’s National Direct of Tax, at 202.808.7023 for more information.