Complying With the New Partnership Audit Rules

All domestic and foreign partnerships are now subject to the new partnership regime, beginning with 2018 tax returns. Generally, the new regime imposes a partnership-level obligation for amounts due as a result of any IRS audit adjustments. The increase in tax now becomes an obligation of the partnership in the year the taxes are finally determined (the “adjustment year”) rather than of those who were partners in the year under audit (the “reviewed year”). Certain partnerships are eligible to opt-out, while others may want to consider alternatives for shifting the tax burden back to the partners.

Electing Out

Eligible partnerships (100 or fewer partners) may elect out of the new regime. The election must be made annually on a timely filed return, including extensions, for the tax year to which the election applies and, once made, is irrevocable for that year. A partnership making an election to opt out of the new regime must also disclose to the IRS certain information about each partner and notify each partner within 30 days of making the election.

Partnership Representative

One of the requirements under the new regime is the designation of a partnership representative (PR), which is similar to the Tax Matters Partner (TMP) under TEFRA rules but with significant differences. Any person or entity with substantial presence in the U.S. can be designated and will remain in that position until he or she resigns, the designation is revoked, or the IRS determines the designation is no longer in effect.

The PR has the power to represent the partnership before the IRS but is allowed to appoint a third party (e.g., CPA or attorney) to represent the partnership through a power of attorney.

Push-Out Election

Alternatively, in lieu of collecting the tax from the partnership, the partnership can elect to “push out” any adjustments to its reviewed-year partners, who must take the adjustments into account at the partner level and report the adjustments on their tax returns for the year in which the push-out election is made, not the reviewed year. The election must be made within 45 days of the date the final IRS adjustment is mailed to the partnership.

Pull-In Procedure

The pull-in procedure effectively shifts the audit liability to reviewed-year partners without making a push-out election. Within 270 days of receipt of the IRS adjustment, in lieu of actually filing an amended return, a reviewed-year partner pays his share of the partnership’s tax and the partnership demonstrates to the IRS that some or all of the reviewed-year partners have been deemed to have amended their reviewed-year tax returns to reflect their share of the audit adjustments and have paid any resulting tax.

Impact on 2018 Partnership Tax Returns

A significant number of partnerships that were previously exempt from the TEFRA audit rules are now subject to the new regime. Before filing 2018 tax returns, all partnerships should seek advice from their professional tax advisors in analyzing the consequences of these new audit provisions and elections, as well as understanding how any resulting tax liability will be computed, assessed and collected.

Steve D. Brodsky, CPA, JD, LL.M. is a Director in the Real Estate Group at Marks Paneth LLP, a premier tax, accounting and advisory firm. He can be reached at sbrodsky@markspaneth.com.