AICPA wants changes from IRS on partnership audit rules

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An official from the American Institute of CPAs asked the Internal Revenue Service to revise its proposed regulations for auditing large partnerships during an IRS hearing Monday.

The IRS proposed regulations this year on auditing partnerships after Congress gave it the ability to streamline the audit process. The Bipartisan Budget Act of 2015 paved the way for a new Centralized Partnership Audit Regime, making it easier for the IRS to audit large partnerships such as major private equity firms, hedge funds and CPA firms by auditing the firm itself and not all the individual partners. Last month, the AICPA recommended a set of changes to the IRS’s proposed regulations in a comment letter (see AICPA asks IRS to change partnership audit rules). In June, the AICPA recommended a one-year delay in implementation of the regime in a separate letter.

The IRS held a hearing Monday in which Sarah Allen-Anthony, a tax senior manager at Crowe Horwath LLP who is also a member of the AICPA’s Partnership Tax Technical Resource Panel, testified on behalf of the AICPA to make the case directly to IRS officials.

“A bedrock principle of partnership taxation is that all items of income and expense flow through to the partnership’s owners, including adjustments related to IRS audits,” said Allen-Anthony. “The Regime replaces this long-standing method with one where the default mechanism requires the partnership to pay any additional tax due, resulting in significant administrative and accounting complexities.”

Allen-Anthony’s talked about the “push-out” process for tiered partnership structures, the impact on partner capital accounts and basis, the process for designating the partnership representative and giving an audited partnership access to the IRS Office of Appeals.

“We propose that the IRS establish procedures to allow for the push-out of audit adjustments through a tiered partnership structure,” said Allen-Anthony in her written testimony. “In general we discourage establishing any limitations on tiers, dollar amounts, number of partners or other attributes because those limitations may result in the partners paying inappropriate amounts of tax. One of the main areas of increased complexity involves the effect of audit adjustments on each partner’s capital account and partnership basis.”

She presented several proposals from the AICPA for simplifying the audit process. The AICPA objects to the IRS’s proposed procedure for appointing a “designated individual” who would act on behalf of an “entity partnership representative.” The AICPA wants to permit a partnership to revoke and replace its partnership representative anytime, and the representative should also have the ability to resign anytime.

The AICPA is also pushing back against a provision in the proposed regulations allowing partnership representatives who resign to appoint their own successors. The AICPA would like the IRS to clarify that all partnerships be required to appoint a partnership representative on their tax returns to protect the interests of both the IRS and the partnership.

Allen-Anthony pointed out that the IRS’s proposed regulations don’t contain a reference to an audited partnership’s right to challenge various determinations under the Centralized Audit Regime with the IRS Office of Appeals. She called the appeals process a “vital option for taxpayers to resolve an issue without having to go Tax Court.” She gave five examples in her testimony of how partnerships should have the right to challenge actions or determinations by the IRS through the appeals process.

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Partnerships Tax audits Tax regulations