Developing a uniform state approach to the new federal partnership audit regime.

• Author: Jensen, Jennifer

A new law and process for federal audits of partnerships will likely require states to consider legislation to amend their laws to ensure their tax agencies can administer their taxes under the new federal regime. With the many state tax issues involved, the AICPA is working with several other organizations to develop draft model state legislation (available at tinyurl.com/y96fpkw4) for reporting federal tax changes to the states, including the new partnership audit process. States are likely to consider this issue over the next year.

This column, the first part of a two-part discussion on state issues with the new federal partnership audit regime, discusses key issues states must consider and the steps some states have taken to align their partnership audit rules with the new federal rules. Part 2, which will appear in the March 2018 issue, will review the major points of draft model state legislation that the AICPA is working with other industry organizations to develop.

New federal rules

Starting with tax years beginning on and after Jan. 1, 2018, many partnerships will be subject to a new auditing regime Congress enacted as part of the Bipartisan Budget Act of 2015, P.L. 114-74, to improve the IRS's ability to audit partnerships. In June 2017, the IRS issued proposed regulations (REG-136118-15) to provide further guidance on implementing the new audit procedures.

AICPA tax advocacy efforts on the federal rules

On Oct. 7, 2016, the AICPA developed and submitted to the IRS and Treasury suggestions for guidance needed for implementation of the new partnership audit rules (the letter is available at tinyurl.com/jufd48e).

On Nov. 17, 2016, the AICPA submitted to Congress suggested recommendations for technical corrections legislation (the letter is available at tinyurl.com/j29m982). On Dec. 6, 2016, the Tax Technical Corrections Act of 2016, H.R. 6439, was introduced in the 114th Congress with Title II containing technical corrections to the partnership audit rules, including several of the clarifications that the AICPA requested. The technical corrections legislation was not enacted before Congress adjourned on Dec. 9, 2016, but it is expected to be reintroduced and enacted in this 115th Congress.

In June 2017, the AICPA requested that the IRS and Treasury consider asking Congress to provide a one-year delay in the effective date of the new audit process because the regulations are not yet final and technical corrections are needed to address various issues with the legislation (the AICPA's letter is available at tinyurl.com/yd9oaezn).

On Aug. 14, 2017, the AICPA submitted comments (available at tinyurl.com/ycqkb6w4) on the proposed regulations issued in June 2017 and testified at the IRS hearing on Sept. 18, 2017 (the testimony is available at tinyurl.com/yarvasdo).

Practitioners should stay tuned for further developments with the new partnership audit procedures. The AICPA Tax Policy and Advocacy group will continue to monitor, comment as appropriate on, and keep members updated on future changes.

State tax issues

As discussed in the March 2017...