Unified partnership audit procedures revisited.

• Author: Glass, Elliott

In the late 1970s and early 1980s, the IRS was required to devote substantial resources to fighting tax shelters. Generally, these were structured as partnerships, passing "aggressive" deductions and tax credits to the investors for use on their personal returns. Once the Service identified a shelter to be examined, it needed to identify all partners (including those deriving their interests via other flowthrough entities) and deal with each on an individual basis. This meant procuring waivers of the statute of limitations (SOL), issuing 30-day letters and ultimately statutory notices of deficiencies to numerous individuals, often in different parts of the country, for identical issues. The strain on the IRS and the Tax Court was staggering, and many taxpayers fell through the cracks.

In an effort to combat these problems, Congress enacted new Secs. 6221-6233 as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). These provisions created procedural mechanisms to allow the Service to audit and adjust all matters relating to a partnership at the entity level, with the ultimate determinations binding on the partners. Central to this scheme is the Tax Matters Partner (TMP), who has a great deal of authority to affect the tax liability of all the partners. These unified audit proceedings allow the IRS to issue a Notice of Beginning of Administrative Procedure (NBAP) to the TMP to start the unified audit procedures. From that point on, the TMP has substantial authority in its dealings with the Service, including the ability to extend the SOL, settle matters at the administrative level and even petition the Tax Court and litigate issues relating to the partnership's reported income and deductions. The provisions contain many detailed rules on notices to the partners as to the status of any such partnership proceedings, the ability of partners to elect out of these rules in certain circumstances and the...