IRS Gives New Partnership Audit Rules Another Try

IRS auditAnyone that says tax law is a boring, static area of practice is not paying attention. Tax law often changes, as highlighted by recent adjustments coming up involving how the Internal Revenue Service (IRS) will conduct audits of partnerships.


The audits are designed to allow the federal agency to review the partnership’s income, gains and losses as well as deductions, credits and the partners’ distributive shares for the tax year under review.


Look familiar? Think you are experiencing déjà vu? If the new regulations look familiar, they are. The IRS issued similar regulations back in January. The rules were in place for about two days before the federal agency cancelled the changes.


A recent publication by Bloomberg BNA notes that the new proposal has basically two changes compared to the original: 


  • Removal. An example was removed. This example was used to elaborate on how a partnership should address “the netting of ordinary income and depreciation.”
  • Expansion. A section was also expanded. This portion of the regulations allows for an explanation of tiered partnerships that are set up “to pass thru ‘push-out’ adjustments to ultimate partners.”


Who does this change impact? The new regulations are scheduled to go into effect for partnerships that file returns beginning after December 31, 2017.


Two impacts to watch for include changes to imputed underpayments and the partnership representative role. Imputed underpayments will generally be subject to assessment and collection at the partnership level. Partnership representatives will likely have more power in the eyes of tax officials. These changes are designed to result in any actions taken by this representative to be viewed as binding for the purposes of the applications of tax laws.


How can I protect my partnership? Steps can be taken to mitigate the impact of these changes. The language used to guide the standards for actions of partnership representatives within the partnership agreement should be carefully crafted to ensure the business’ and other partners’ interests are protected. An experienced attorney can help review these documents and can provide guidance if the IRS audits your partnership. 


To discuss concerns about an audit, contact Robert J. Fedor, Esq., L.L.C., at 800-579-0997, or email our firm. We invite you to arrange a phone consultation or a meeting at our offices in Cleveland, Ohio, or Chicago, Illinois.

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