The Bipartisan Budget Act of 2015January 2016
On November 2, 2015, President Obama signed Public Law 114-74, the "Bipartisan Budget Act of 2015" (the "Act"), which will make major changes to the rules governing partnership audits. The expected impact of the new law is magnified by announcements earlier this year that the IRS intended to focus more resources on auditing partnerships. The new law is effective for returns filed for partnership tax years beginning after December 31, 2017, and it is expected to affect partnerships as well as limited liability companies that are treated as partnerships for tax purposes.
Currently, partnerships are audited under three regimes: (i) the small partnership rules; (ii) the unified partnership audit rules; and (iii) the electing large partnership rules (the "ELP rules"). The new law eliminates the unified partnership audit rules (referred to as the "TEFRA unified audit rules" or the "TEFRA rules" because they were introduced in the Tax Equity and Fiscal Responsibility Act of 1982) and the ELP rules, and it replaces them with a single set of streamlined rules for auditing partnerships and their partners, at the partnership level. Partnerships with 100 or fewer qualifying partners may opt-out of the new rules, in which case the partnership and partners will be audited under the general rules applicable to individual taxpayers.
Under the new streamlined procedure, the IRS will examine items of income, gain, loss, deduction, or credit and partners' distributive shares of such adjustments, for the particular partnership year being audited (the "reviewed year") at the partnership level for partnerships with more than 100 partners. Any tax attributable to such adjustments will be assessed and collected, and the applicability of any penalty, or addition to tax related to the adjustment, will be taken into account at the partnership level, in the year in which the adjustment is determined (the "adjustment year").
The Act also makes it prudent to revisit provisions and partnership agreements going forward. Currently, many operating agreements contain provisions regarding the appointment of a "tax matters partner." The Act replaces the tax matters partner with a "partnership representative" who is not required to be a partner in the audited partnership and who needs to have only "a substantial presence in the United States." Because the Act eliminates the concept of a "notice partner," the partnership representative has the exclusive right to take action with respect to a partnership audit, which may include litigating or settling IRS claims. Thus, going forward, provisions in partnership agreements and operating agreements should be revised accordingly.
Although the new rules will generally apply to partnership tax years beginning after December 31, 2017, partnerships may elect for the changes to apply to any partnership return filed for partnership tax years beginning after November 2, 2015, the Act's date of enactment, and before January 1, 2018.