Late last year, Congress passed legislation that sought to remove and replace the current audit rules for partnerships under TEFRA. The new rules apply to make the partnership entity liable for taxes and penalties due on the income and expense adjustments that the IRS makes to a partnership’s return. Today the IRS issued its first set of interpretative temporary regulations offering needed (albeit limited) guidance regarding the new partnership audit regime.
As the new rules are effective for tax years beginning on or after January 1, 2018, the IRS’ temporary regulations address the circumstances under which a partnership may elect to have these rules apply before that date. The highpoints of the temporary regulations are discussed below, and a full copy of the regulations may be reviewed here: https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-18638.pdf.
- An election may only be made for partnership tax returns filed for tax years beginning after November 2, 2015.
- A partnership may not elect into the new rules for purposes of electing out. (This prevents partnerships subject to TEFRA from avoiding both TEFRA and the new rules, thereby forcing the IRS to audit each partner individually.)
- Once the election is made for a tax year, it cannot be revoked for that same tax year without IRS consent.
- An election will not be valid if it frustrates the purpose of the new audit rules. (One example is where the partnership is not liquid enough to pay the entity level tax.)
- To make the election, the partnership must submit a written statement within 30 days of the IRS first notifying the partnership that its return for an eligible tax year has been selected for audit. Alternatively, the partnership may make an election with the filing of an administrative adjustment request (AAR) in the manner to-be-prescribed by the IRS (i.e., new form).
- Among other things, the statement must include identifying information about the partnership, the person signing the statement and his or her authority to do so, and the person designated as the partnership representative.
- The statement must include several representations regarding the partnership’s intent and liquidity, including that: (i) the partnership is not insolvent nor does it anticipate becoming insolvent, (ii) the partnership is not currently pursuing bankruptcy nor anticipating a bankruptcy filing, and (iii) the partnership has sufficient assets, and reasonably expects to have sufficient assets, to pay any tax liability ultimately determined.
- Perhaps most significant, the statement must include a representation, signed under penalties of perjury, that the individual signing the statement is duly authorized to make the election and that to the best of his or her belief, the statement is true, correct and complete.
If you have any questions about these new temporary regulations, or the new partnership audit rules generally, please do not hesitate to contact Anthony Daddino at (214) 749-2464.