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Ready or Not, Here They Come! The New Partnership Audit Rules

On November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506. The New Audit Rules take effect for taxable years beginning on or after January 1, 2018, and are intended to facilitate Internal Revenue Service (IRS) audits and adjustments with respect to certain types of partnerships. In the wake of the New Audit Rules, all partnerships should evaluate whether their agreements (existing as well as those in the...

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Substantial Changes to Auditing Partnerships

On November 2, 2015, the Bipartisan Budget Act of 2015 was signed into law, and which instituted significant changes to the rules governing the federal tax audits of partnerships for tax years after 2017.  In the absence of affirmatively electing partner-level adjustment, the new rules impose entity-level tax liability for Internal Revenue Service (IRS) audit adjustments to partnerships.  The new rules are a significant departure from what has historically been merely pass-through treatment of partnerships for US federal income tax issues. There is a small partnership exception to elect out of the new audit rules.  This election may apply to partnerships with 100 or fewer partners, each of which is an individual, a C corporation, an S corporation or an estate of a deceased partner.  However, any tiered partnership – partnerships that have partnerships as partners – are ineligible for the exception. The new rules determine IRS audit adjustments at the...

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