Proposed Partnership Audit Regulations Reissued in Substantially Identical Form
On June 13, 2017, the U.S. Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) re-released proposed regulations (REG 136118-15) that provide guidance on the new centralized partnership audit regime. The centralized partnership audit regime was enacted in November 2015 by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended in December 2015 by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113 (altogether “the BBA rules”).
The BBA rules assess and collect tax at the partnership level, replacing the audit procedures that were enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and the electing large partnership rules. Under the TEFRA rules, audit adjustments related to partnership items were determined at the partnership level, but enforced at the partner level while adjustment related to partner-level items were determined and enforced at the partner level. On the other hand, the BBA rules provide that tax on any adjustment in a partnership audit that results in additional partnership income is assessed and collected at the partnership level. The partnership can elect under the BBA rules to “push out” the adjustment to its partners. The BBA rules replace the tax matters partners under TEFRA for a “partnership representative,” who will serve as the only point of contact between the partnership and the IRS. The new partnership audit rules apply to partnership tax years beginning after December 31, 2017. The new rules’ effective date is based on the partnership’s reporting year that is under audit regardless of when the audit itself is conducted. The BBA rules did not include significant details but it provided the Secretary of Treasury with deference as to how some provisions would be implemented; therefore taxpayers have been awaiting Treasury regulations.
During the final days of the Obama administration in January 2017, the IRS and the Treasury issued proposed regulations for the BBA rules. However, those proposed regulations were withdrawn after the incoming Trump administration issued an executive order on January 20, 2017, ordering all executive departments and agencies to freeze new and pending regulations.
As expected, the new proposed regulations issued in June 2017 are substantially identical to the withdrawn proposed regulations. The proposed regulations include guidance on the scope of the new partnership audit regime; procedural rules on electing out of the regime; the requirement that a partner’s treatment of items on its tax return must be consistent with the treatment of such items on the partnership’s return; details regarding the partnership representative; and details regarding the imputed underpayment, among other things. A public hearing on the proposed rules will be held in Washington, DC on September 18, 2017 at 10:00 AM.