Appropriations bill changes partnership audit regime

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The $1.3 trillion omnibus appropriations bill passed by Congress last week includes some modifications to the Internal Revenue Service’s centralized audit regime for auditing large partnerships.

The centralized audit regime is supposed to make it easier for the IRS to audit large partnerships by being able to audit the entire partnership as a whole rather than every single partner. 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, in general, assesses and collects tax at the partnership level.

The technical corrections in the appropriations bill enable a partner’s adjustments to capital gains and losses to be figured separately, however, and then netted afterward when appropriate, according to Bloomberg Tax. The audit rules can apply to any item on a partner’s tax return that has an impact on their tax liability.

Any changes that are favorable to the taxpayer that happen between an audit and when the adjustment is pushed out can count now. Partners can also now push out their unpaid tax liabilities to the ultimate investor in a tiered partnership. A “pull-in procedure” permits modifying an imputed underpayment without requiring partners to file amended tax returns.

The definition of "partnership adjustment" has also been changed, according to the Journal of Accountancy, to mean "any adjustment to a partnership-related item." It also brings the new audit regime in line with other sections of the tax code so it doesn't apply to self-employment income, unearned income Medicare contributions, FATCA, and withholding on nonresident aliens and foreign corporations.

The mammoth bill also provides a $320 million funding increase for the IRS to administer the new tax law and fixes a provision in the law that gave an advantage to farm cooperatives over corporate agribusinesses (see Congress to give IRS $320M funding boost to administer new tax law while fixing ‘grain glitch’).

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Tax audits Finance, investment and tax-related legislation IRS