IRS Substantially Reissues Proposed Partnership Audit Regulations
On June 13, 2017, the Treasury and IRS issued 277 pages of proposed regulations that implement partnership audit rules contained as part of the Bipartisan Budget Act of 2015 (“BBA”).* They are substantially the same as proposed regulations that had been issued in January, 2017 but almost immediately withdrawn as part of President Trump’s freeze on new and proposed regulations. The rules are generally effective for tax years beginning after December 31, 2017 (except in cases where a partnership is permitted to “opt-in” early and elects to do so). A public hearing is scheduled for September 18, 2017 with respect to these proposed regulations.
On December 6, 2016, Congress introduced the Tax Technical Corrections Act of 2016 (“TCA”), which contains technical corrections to the new partnership audit rules and other provisions. The TCA has not been enacted by Congress, though it (or a variation thereof) may be considered by the current Congress alone or as part of broader legislation.
One significant issue that remains unresolved in the proposed regulations involves the treatment of tiered partnerships. Under the BBA, a partnership can elect to “push out” audit adjustments to reviewed year partners. These partners then take their share of any adjustments into account on their individual returns in the adjustment year. In the case of tiered partnerships, the unanswered question has been whether a push-out would be permitted beyond the first tier. The Joint Committee on Taxation’s General Explanation of Tax Legislation Enacted in 2015 (“blue book”) has been read by many as not permitting a push-out beyond the first tier. As noted in the blue book, in the case of tiered partnerships, “a partnership that receives a statement from the audited partnership is treated similarly to an individual who receives a statement from the audited partnership.” However, the TCA as drafted would allow a partnership to flow the adjustments through the tiers.
The just-issued proposed regulations continue to “reserve” on this issue. Its preamble, observing that the TCA approach to tiered partnerships “presents significant administrative concerns,” notes that “the Treasury Department and the IRS are considering an approach … for tiered partnerships for pushing the adjustments beyond the first tier partners that will be the subject of other proposed regulations to be published in the near future.” This is a new development. Further, the Treasury and IRS are seeking comments on the “information tracking and other information sharing from the partnership under examination with respect to its direct and indirect partners to the IRS that are necessary for the IRS to monitor whether adjustments are properly flowed through the tiers and to determine that the proper taxpayers take into account the correct amount of adjustments and report the correct amount of any resulting tax, interest and penalties.” Considering the number and growth of tiered partnerships and their impact on the compliance process and administrative costs of the IRS, this is a high profile issue that needs to be resolved if the BBA partnership rules are to be effectively and efficiently implemented.
As the effective date of the new partnership audit rules draws closer, it is incumbent on existing partnerships and partnerships in formation to evaluate the impact of these rules on their operations and governance and to take any appropriate actions. We anticipate additional guidance from the Treasury and IRS with respect to the partnership audit rules in the coming months.
“Major Changes in Partnership Audit Procedures Contained in 2015 Budget Act”
“Consideration of Recent Partnership Audit Rule Changes a “Must” for New and Existing Partnership and LLC Operating Agreements”
“Temporary and Proposed Regulations Issued for “Opting-In” to New Partnership Audit Rules Early”