Partnership Audit Rules Kristin Balding Gutting Associate Professor, Charleston School of Law

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Out with the Tax Matters Partner in with the Partnership Representative. Procedural Issues.

1 Partnership Audit Rules Kristin Balding Gutting Associate Professor, Charleston School of Law 1 Agenda What are the new partnership audit rules? Overview. Default Rule. Push Out Election. Out with the Tax Matters Partner in with the Partnership Representative. Procedural Issues. Can a partnership elect out of the new partnership audit rules? The Election. Qualifying Partnerships. What should you do next? What does the new partnership audit rules mean for compliance? 2 1

2 What Are The New Partnership Audit Rules? 3 Overview Pre-1982 Regime. Tax Equity Act and Fiscal Responsibility Act of 1982 (TEFRA). Electing Large Partnership Regime (ELP). The Bipartisan Budget Act of 2015 (BBA). 4 2

3 Overview Proposed Treasury Regulations published on January, 18, 2017 and withdrawn January 20, Proposed Treasury Regulations reissued on June 14, Public hearing on Proposed Treasury Regulation on September 18, Proposed Treasury Regulation issued on November 30, 2017 (International). Proposed Treasury Regulations issued on December 19, 2017 (Push Out Election and Procedural). Final Treasury Regulation issued on January 2, 2018 (Election Out of BBA). Proposed Treasury Regulations issued on February 2, 2018 (Adjusting Tax Attributes). Technical Correction to BBA on March 23, Proposed Treasury Regulations issued in August Overview Effective for taxable years beginning on or after January 1, 2018 (can be early adopted for audits 2016 & 2017 tax years) Anticipating increased audits of partnerships + Estimated revenue $9.3 billion from Goal make it easier for the IRS to conduct audits and collect taxes from those audits, especially large partnerships 6 3

4 Overview Scope: + items of income, gain, loss, deduction, or credit & partnership-related items. these partnership audit rules are not narrower than the Tax Equity and Fiscal Responsibility Act of 1982 ( TEFRA ) partnership audit rules, but rather, are intended to have a scope sufficient to address those items described as partnership items, affected items, and computational items in the TEFRA context in Treasury Regulations sections (a)(3), (a)(5), and (a)(6), as well as any other items meeting the statutory definition of a partnership-related item. + Do not apply to: Taxes or required withholding under the self-employment tax or net investment income tax provisions, Nonresident alien and foreign corporation withholding provisions, or FATCA withholding provisions. 7 Polling Question #1 When are the new partnership rules effective? a. Tax year beginning on or after January 1, 2018 b. Tax year beginning on or after January 1, 2019 c. Tax year beginning on or after January 1, 2020 d. Tax year beginning on or after January 1,

5 Default Rule Places burden of liability on adjustment year partners Partnership-Level Audit Partnership-Level Assessment Partnership-Level Collection Taxed at highest tax rate 9 Default Rule Assume the audit was for the 2018 taxable year (reviewed year), but occurred in 2020 (adjustment year). Partners in 2018 A, B, and C. Partners in 2020 A, B, and D. Under the default rule, D would bear the tax implications for a year D was not a partner. 10 5

6 Default Rule At the conclusion of the audit, the IRS sends a Notice of Proposed Partnership Adjustment (NOPPA) to the partnership representative stating the Imputed Underpayment. The partnership representative can ask for modifications to the Imputed Underpayment. + Reasons include: Reviewed partner(s) filed amended returns (or pull-in procedure), Lower tax rates attributable to income allocated to reviewed partners, or Amounts allocable to tax-exempt partner(s) Day Rule. + Must provide partnership s structure, operation, and ownership details (and any other info requested by IRS to substantiate modification). 11 Polling Question #2 The new partnership audit rules default rule assesses the tax at the partner level. a. True b. False 12 6

7 Push Out Election Partnership election to push out the tax adjustment to the reviewed year partners Possible refund available Allowed for tiered partnerships Caveat: The interest rate on the underpayment of tax is 2% higher if the push out election is made 13 Push Out Election Must be made within 45 days from date Final Partnership Adjustment (FPA) is mailed. Provide: Name, Address, and TIN of Partnership Push-Out Election Taxable Year A Copy of FPA Identification of Specific Imputed Underpayments (If Any), and Name, Address, and TIN of each Reviewed Year Partner Signed By PR 14 7

8 Push Out Election + Within 60 days of the final determination of partnership s tax liability, the partnership representative must provide each reviewed year partner a statement containing information about the reviewed year partner s share of the partnership's adjustments attributable to the audit (Revised Schedule K- 1). + Final determination of partnership s tax liability the later of: (1) the expiration of the time to a file a petition for judicial review of the FPA or (2) if such a petition is timely filed, when the court's decision becomes final. + Must file with the IRS. 15 Out with the Tax Matters Partner in with the Partnership Representative Partnership Representative: + Sole authority to act on behalf of the partnership + Other partners: No right to participate No right to notice of proceedings Bound by actions of partnership representative 16 8

9 Out with the Tax Matters Partner in with the Partnership Representative Partnership Representative: Does not have to be a partner. Could be an entity, such as partnership s management company ( entity partnership representative ). But must appoint an individual with substantial presence in United States to act on behalf of the entity partnership representative ( designated individual ). Must have a substantial presence in United States. Available to meet in person with the IRS in the United States at a reasonable time and place; Have a street address in the United States; Have a telephone number where the partnership representative can be reached during normal business hours; and Have a United States taxpayer identification number. 17 Out with the Tax Matters Partner in with the Partnership Representative Partnership Representative: Annually designate on tax return No designation equals IRS selection 18 9

10 Polling Question #3 The partnership representative can be an entity a. True b. False 19 Procedural Issues Interest Rate Increase Deposits Allowed Assessment of Imputed Underpayments Not Subject to Deficiency Procedures Statute of Limitations Penalty Defenses 20 10

11 Can a Partnership Elect Out of the New Partnership Audit Rules? 21 Qualifying Partnerships 1)No Ineligible Partner; + Eligible Partners: Individuals, Estates of a Deceased Partner, or S or C corporations (or foreign entities treated as a C corporation). Regulated Investment Companies (RICs) Real Estate Investment Trusts (REITs) + What about disregarded entities? Single Member-LLC? Grantor Trust? 22 11

12 Qualifying Partnerships 2) 100 or Less Schedules K-1 Rule; and + S corporations count as one Schedule K-1 and each shareholder of the S Corporation counts as an additional Schedule K-1. Example: If ABC Partnership has 40 individual partners and 1 S corporation partner that has 60 shareholders, then ABC Partnership would be considered to have 101 Schedule K-1s. Thus, it could not elect out of the new partnership audit rules. + What about multiple Schedule K-1s? + What about the transfer of an interest during the year? 23 Qualifying Partnerships 3) Annual Election Made Timely and Properly. Provide the names, TIN, and United States federal tax classifications of all partners (including all shareholders of any S corporation partner); Notify its partners within 30 days after making the election; and Must be made on a timely filed return (including extensions) to which the election relates

13 Polling Question #4 For purposes of electing out of the new partnership audit rules, which partner is an ineligible entity? a. Partner A, an individual b. Partner B, an estate c. Partner C, a C-corporation d. Partner D, a single member LLC 25 What Should YOU Do Next? 26 13

14 What should you do next? Amend your partnership agreement/operating agreement No one size fits all Many important decisions to make 27 What should you do next? Who will be the personal representative? What should be the personal representative s contractual rights, duties, and liability protection? Right to Retain Experts. Indemnification/Exculpation (D & O Insurance). Duty to provide notice. Duty regarding decision-making powers. What should be the procedure for replacing the personal representative? What duties should the current and former partners have to the personal representative? 28 14

15 What should you do next? Should the partnership elect out of the new partnership audit rules? Should the partnership implement restrictions disallowing the grant of future partnership interest to ineligible partners? Should the partnership implement restrictions disallowing the transfer of partnership interest to ineligible partners? Should the partnership make the push-out election mandatory? 29 What Does the New Partnership Audit Rules Mean for Compliance? 30 15

16 Compliance Plan ahead Procedures in place to review each election + Best interest of client + Allowed under partnership/operating agreement + Timely filed + Includes proper information Make sure partnership representative is named Be aware of increased audit risk 31 Questions? Feel Free to Contact Me At: kgutting@slk-law.com

The BBA Partnership Audit Rules. What you need to know today to prepare for the new partnership audit regime under the BBA

The BBA Partnership Audit Rules. What you need to know today to prepare for the new partnership audit regime under the BBA What you need to know today to prepare for the new partnership audit regime under the BBA Disclaimer This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does