
INSIGHTS FROM OUR NATIONAL TAX OFFICE	NOVEMBER 12, 2015

Bipartisan Budget Act of 2015 Substantially Changes Partnership Audit Rules

On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015. The act includes partnership provisions that substantially revise the rules pertaining to TEFRA and Electing Large Partnership (ELP) tax audits conducted by the Internal Revenue Service. The goal of the changes is to enable the IRS to increase its audit coverage of larger partnerships in a period of declining personnel resources available to conduct these audits.

Current Audit Regimes

Under current law, there are three distinct audit regimes the IRS uses for partnership audits:

Small Partnership Rules

These are used for partnerships with fewer than 10 partners/members and/or having no flow-through partners. In these cases, the IRS opens up an audit on the partnership for a particular tax year and also opens up an audit for each of the individual partners/members, then computes the adjustments applicable to each individual partner's tax return for the year being audited.

TEFRA Partnerships with Flow-through Partners or Partnerships Having 10 or More Partners

In these partnerships, the IRS first notifies each of the partners about the audit of the partnership. The IRS then computes changes at the partnership level and sends an adjustment notice letter to each of the partners/members for the year notifying them of the adjustment which is assessed directly to each partner, but the IRS does not open an audit on each of the partners.

ELP Partnerships with 100 or More Partners

These audits are mostly for publicly traded partnerships. The IRS audits the partnership for a tax year, the results of which are communicated and billed to the partnership. The audit changes are recognized at the partnership level and included in the partners/members K-1 for the year the tax settlement is made, instead of the year being audited.

ELP Audit Now the Norm

The act's streamlined audit procedures effectively subject all partnerships to the current ELP audit regime in which the partnership is audited and directly billed at the entity level for any additional taxes, interest and penalties resulting from audit changes. Because income and expense changes will be included on the partnership tax return and the partners K-1 forms for the year the audit is settled, instead of the year under audit, fewer individual partners will need to file amended tax returns.

Of course, there are complications and options with these new rules. An additional election is available for partnerships with fewer than 100 partners to be audited under the old Small Partnership Rules. Partnerships that have partner changes, or nonprofit partners, will be allowed certain adjustments to the audit findings, and there are provisions for issuing a revised K-1, but not Amended K-1, containing information pertaining to the tax year audited for those partners who are no longer partners in the year of the audit settlement.

Effective after 2017

The effective date for the partnership audit changes under the act is for tax years beginning after December 31, 2017, unless the partnership makes an election to apply the new rules (other than the Small Partnership Rules) earlier. Therefore, the first possibility to deal with these new rules should be in audits of 2018 tax returns, which, at the earliest would occur in 2019. An election to apply the Budget Act partnership audit provisions early, other than the Small Partnership Rules, can be made for partnership years beginning after November 2, 2015, and before January 1, 2018.

We will be monitoring and reporting on the additional guidance the IRS will be providing in the next few months. If you have immediate questions about how the act impacts your partnership, please contact your Eide Bailly professional.

Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, IRS controversy and procedures, R&D tax incentives, tax-exempt organizations, tax legislation, accounting methods and pass-through entities.

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