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IRS Consults On New US Partnership Audit Regime

by Mike Godfrey,, Washigton

08 March 2016

The US Internal Revenue Service (IRS) has issued Notice 2016-23 requesting comments by April 15, 2016, on the new regime for auditing partnerships, including private equity and hedge funds, which was enacted as part of the Bipartisan Budget Act of 2015 (BBA).

The new regime for the auditing of partnerships was one of the BBA's measures to raise additional revenue to fund part of the total two-year budget. The IRS has previously experienced serious difficulties in auditing large partnerships – those with 100 or more partners and assets exceeding USD100m – largely because of their structural complexity. In fiscal year 2012, IRS audited only 0.8 percent of large partnerships, compared to a 27.1 percent audit rate for large C corporations.

Currently, all partnerships are taxed on a pass-through basis, with income reported on partners' income tax returns. According to Section 1101 of the BBA, partnership audit rules will be streamlined into a single set of rules for auditing partnerships and their partners at the partnership level.

Under this streamlined audit approach, the IRS will examine the partnership's items of income, gain, loss, deduction, credit, and partners' distributive shares for a particular year of the partnership. Any adjustments will be taken into account by the partnership (not the individual partners).

In addition, partners will not be subject to joint and several liability for any liability determined at the partnership level. A partnership will have the option of initiating an adjustment for a reviewed year, including demonstrating that the adjustment would be lower if it were based on certain partner-level information from the reviewed year rather than imputed amounts determined solely on the partnership's information.

The new regime will be effective for tax years beginning after December 31, 2017, although partnerships may elect for parts of the new regime to apply to partnership taxable years beginning after November 2, 2015, and before January 1, 2018. The IRS intends to publish guidance on that election in the near future.

TAGS: compliance | tax | business | private equity | tax compliance | law | accounting | hedge funds | audit | Internal Revenue Service (IRS) | tax authority | legislation | United States | legislation amendments

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