Partnership Audit Rules: After the Final Regulations

Abstract

As part of the Bipartisan Budget Act of 2015 (BBA), Congress repealed the TEFRA audit rules and the audit rules for electing large partnerships and replaced them with a new audit regime (the BBA audit rules). The BBA audit rules generally are effective for audits of partnership returns for tax years beginning after 2017. Although the TEFRA audit rules were enacted in 1982 to address issues with partnership audits, particularly tax shelters, they proved difficult to implement. In a 1990 report to Congress, the Internal Revenue Service (IRS) and the Treasury concluded that large partnership audits were an inefficient and time-intensive use of limited resources. The BBA audit rules address the deficiencies of the TEFRA audit rules through a centralized audit system that requires partnership adjustments to be determined at the partnership level and any tax attributable to the adjustments to be assessed and collected at the partnership level. The rules allow for a small-partnership opt-out and an elective alternative to “push out” the audit adjustments made and tax paid to the partners. The audit process is streamlined by limiting the right to notices and participation in the audit to one “partnership representative” who has the “sole authority” to act for the partnership in an audit.

Regulations finalizing most aspects of the BBA audit rules were published in February 2019. Two prior Treasury Decisions adopted particular aspects of the rules — the opt-out election, and the opt-in election and the partnership representative. Proposed regulations regarding international aspects of the rules and tax attributes have not been finalized. This article sets out the BBA audit rules as reflected in the statutes and the final regulations issued to date. With the issuance of these regulations, partnerships have a detailed set of instructions to follow to comply with the rules and prepare for an audit. Going forward, the Treasury has left sufficient flexibility in the regulations to develop and adapt procedures as the IRS and partnerships “gain more experience” with the rules. Finalizing proposed regulations on international aspects and tax attributes will close remaining gaps. The BBA audit rules are extremely complex, but they should enable partnership audits to proceed more smoothly and efficiently than under the TEFRA audit rules.

Keywords: partnership tax audit, Bipartisan Budget Act of 2015, BBA, TEFRA

JEL Classification: K, M