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Proposed Bipartisan Budget Act of 2015 Would Change Partnership Audit Rules

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On Monday, October 26, 2015, House Republican leadership, including House Speaker John A. Boehner (R-OH), introduced legislation, in the form of a “discussion draft,” to raise the U.S. debt limit and increase near-term spending while implementing long-term spending cuts and various revenue-raising provisions.

The Obama administration and Senate leadership have tentatively agreed to the proposal, and voting could begin this week and would likely need to be completed by November 3, when the Treasury Department projects the debt limit will be reached.

One of the revenue-raising provisions contained in this legislation introduces a new process that would allow the Internal Revenue Service (IRS) to assess taxes against and collect taxes directly from large partnerships, making it easier for the IRS to conduct audits of such entities.

Under the proposed legislation, which would be applicable to partnership tax years beginning after 2017, the current TEFRA and Electing Large Partnerships audit rules (applicable to partnerships with more than 10 partners and audits of electing partnerships with 100 or more partners, respectively) would be replaced with a single set of rules for auditing partnerships and their partners at the partnership level. Partnerships with 100 or fewer qualifying partners would be permitted to elect out of these new rules.

In a partnership-level audit, the IRS would examine the partnership’s items of income, gain, loss, deduction, credit and partners’ distributive shares for a particular partnership tax year. Adjustments made pursuant to such partnership-level examination would be taken into account by the partnership in the year that the audit is completed. Where such partnership-level examination results in an unfavorable net-adjustment, the IRS would compute an “imputed underpayment,” assessed against the partnership, by multiplying the net-adjustment by the highest rate of tax in effect for the year of examination. Partnerships would be permitted to demonstrate that a lower imputed underpayment is proper based on certain partner-level information from the reviewed year, such as amended returns of partners, the tax classification of partners and their associated tax rates, and the character of the income subject to adjustment.

Rather than taking these adjustments into account at the partnership level, a partnership could instead issue adjusted Forms K-1 to the partners for the year under review, and those partners could take the adjustments into account on their returns in the year of adjustment.

A partnership could also initiate a partnership-level adjustment on its own, for example, when it believes an additional payment is due or an overpayment was made. Generally, the partnership could take the adjustment into account at the partnership level (provided the adjustment is not to recover an overpayment of tax) or issue adjusted information returns to each partner.

Unlike prior similar proposals, partners would not be subject to joint and several liability for partnership-level liabilities.

The text of the discussion draft is available here.

The House section-by-section summary of the bill is available here.

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