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US CPAs Recommend Easing Tax Rules On Partners Of Audited Firms

by Mike Godfrey,, Washington

22 May 2018

The American Institute of Certified Public Accountants (AICPA) has recommended that proposed regulations regarding the Centralized Partnership Audit Regime should provide "maximum flexibility" in adjusting the tax attributes of an audited partnership and its partners.

Introduced in the Bipartisan Budget Act of 2015, the new regime allows the IRS to audit the firm itself rather than each individual partner, in a bid to streamline the assessment of large partnerships such as private equity firms, hedge funds, and certified public accountants.

The proposed IRS regulations, issued on February 2, 2018, provide rules addressing how and when partnerships and their partners adjust tax attributes to reflect audit adjustments under Internal Revenue Code Section 6225 of the Centralized Partnership Audit Regime.

According to the AICPA, a partnership is generally 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 include: the tax basis and book value of a partnership's property; amounts determined under Section 704(c) (which deals with the sharing of income, gain, loss, and deduction with respect to property contributed to the partnership by a partner); adjustment year partners' bases in their partnership interests; and adjustment year partners' capital accounts.

The AICPA made the following recommendations related to the proposed regulations, that the IRS should:

  • Provide a flexible procedure for applying audit adjustments to the tax attributes of audited partnerships and their partners.
  • Provide audited partnerships an elective "simplified tax attribute adjustment procedure" (STAAP) under certain conditions. It proposes that only partnerships that accept limitations on the type of Section 6225 modifications that could reduce their imputed underpayment would qualify for the STAAP.
  • Provide audited partnerships an elective "enhanced STAAP," which would expand the types of modifications allowed. It has proposed that only audits resulting in proposed imputed underpayments (before any modifications) below a threshold amount would qualify for the enhanced STAAP.
  • Allow an allocation of an adjustment to property of similar character 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 as a tax-free receipt by the partnership; reduce the partnership's 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.

TAGS: tax | small business | business | private equity | interest | hedge funds | audit | small and medium-sized enterprises (SME) | United States | regulation | penalties | Tax

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