Partnership audits: new, centralized system for tax years coming in 2017.

• Author: Josephs, Stuart R.
• Position: Fed Tax

Under existing law, there are three sets of rules for audits and adjustments for partners and partnerships.

First, for partnerships with more than 100 partners that so elect, the electing large partnership rules apply (existing IRC secs. 6240-6555). Relatively few partnerships have made this election.

Second, for partnerships with more than 10 partners or with pus-through entities as partners (and that are not electing large partnerships), the TEFRA rules apply (existing secs. 6221-6234). TEFRA refers to the 1982 Tax Equity and Fiscal Responsibility Act.

Third, for partnerships with 10 or fewer partners that have not elected the TEFRA audit rules, audit and adjustment rules applicable generally to taxpayers subject to the federal income tax apply

New Law

The 2015 Bipartisan Budget Act (P.L. 114-74), enacted Nov. 2, 2015, repeals the tax reporting provisions and voluntary centralised audit procedures for electing large partnerships as well as the TEFRA partnership audit and adjustment rules.

In place of there repealed procedures, a centralized system for audit, adjustment, assessment and collection of tax applies to all partnerships except those eligible partnerships that have filed a valid election out under new Sec. 6221(b).

Electing out of the centralized system leaves applicable the existing rules for deficiency proceedings.

Effective Date

This new law applies, generally to returns filed for partnership tax years beginning after 2017. However, a partnership may elect the new centralized system (except the election out under new Sec. 6221(b)] to apply to any return filed for partnership tax years beginning after Nov: 2, 2015 and before 2018.

Partnership Level Determinations

Under this centralized system, a partnership audit lakes place at the partnership level. Any adjustment to a partnership's items of income, gain, loss, deduction or credit for a partnership tax year; and any partner's distributive share thereof, generally are determined at the partnership level [new Sec. 6221(a)].

Any tax attributable to these items generally is assessed and collected at the partnership level. The applicability of any penalty, addition to tax or additional amount that relates to an adjustment of any of there items or to any partner's distributive share thereof also is determined at the partnership level.

A tax underpayment determined as a result of an examination of a tax year is imputed to the year during which the adjustment is finally determined and...