AICPA asks IRS for flexibility on partnership audits

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The American Institute of CPAs has written a letter to the Internal Revenue Service asking the IRS to provide maximum flexibility in its regulations for the new centralized partnership audit regime.

The new partnership audit regime was included as part of the Bipartisan Budget Act of 2015. Section 1101 of the BBA repeals the current rules governing partnership audits and replaces them with a new centralized partnership audit regime that basically assesses and collects tax at the partnership level, rather than requiring the IRS to audit each separate partner. That makes it easier for the IRS to audit large partnerships such as hedge funds, private equity firms and big accounting firms.

The IRS issued proposed regulations in February to address how and when partnerships and their partners should adjust tax attributes to reflect audit adjustments under the new regime. The AICPA wants the IRS to provide maximum flexibility in adjusting the tax attributes of an audited partnership and its partners, including an elective simplified procedure.

In a letter Wednesday to IRS officials from AICPA Tax Executive Committee chair Annette Nellen, the AICPA explained that under the Centralized Partnership Audit Regime a partnership generally is liable for the net increase in tax, the “imputed underpayment,” resulting from adjustments to items of income, gain, loss, deduction, or credit of a partnership during the year under audit. Under the proposed regulations, when a partnership pays the imputed underpayment, an exclusive list of tax attributes requires adjustment for adjustment year partners. Tax attributes are defined as “the tax basis and book value of a partnership’s property, amounts determined under IRC section 704(c), adjustment year partners’ bases in their partnership interests, and adjustment year partners’ capital accounts determined and maintained in accordance with section 1.704-1(b)(2).

The AICPA made a number of recommendations on the proposed regulations:

• Provide a flexible procedure for applying audit adjustments to the tax attributes of audited partnerships along with their partners.

• Offer audited partnerships an elective “simplified tax attribute adjustment procedure” (STAAP) under certain conditions. Only partnerships that accept limitations on the type of section 6225 modifications that could reduce their imputed underpayment would qualify for the STAAP.

• Give audited partnerships an elective “enhanced STAAP” that would expand the types of section 6225 modifications allowed. Only audits that lead to proposed imputed underpayments (prior to any modifications) below a threshold amount would qualify for the enhanced STAAP.

• Permit an allocation of an adjustment to property of similar character following the allocation rules set forth in Treas. Reg. § 1.755-1(c) in cases where adjustments apply to specified tax attributes of partnership property held in the reviewed year, but no longer held in the adjustment year.

• Allow any reasonable method of applying successor rules for mergers and divisions occurring between the reviewed year and the adjustment year.

• Treat the remittance by a former partner to the partnership under a reimbursement or indemnification agreement of an allocable share of tax, interest and penalties paid by the partnership under section 6225 as a tax-free receipt by the partnership; reduce the partnership’s section 705(a)(2)(B) expense by the amount of the payment and allocate that reduction in full to the former partner’s successor; and provide that the payment by the former partner is treated as a nondeductible expense by that partner.

Separately, the AICPA issued a working draft Tuesday of the AICPA Accounting and Valuation Guide Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies and is asking for feedback.

This guide offers guidance and illustrations for financial statement preparers, independent auditors and valuation specialists about accounting and valuation of portfolio company investments held by investment companies such as private equity funds, venture capital funds, hedge funds and business development companies. The guide can also be useful for pension funds.

It discusses various accounting and valuation issues to help investment companies and others deal with the challenges of estimating the fair value of such investments. The AICPA is asking for feedback on the draft by Aug. 15, 2018.

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Tax audits Partnerships Tax regulations Private equity Hedge funds Venture capital AICPA IRS