Venable has issued a client alert noting that new audit procedures impacting partnerships were enacted as part of the Bipartisan Budget Act of 2015, signed by President Obama on November 2, 2015. The alert begins as follows:
On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the Act). The Act significantly changes how partnerships (including LLCs taxed as partnerships) are audited by the IRS.
Most non-tax lawyers understand the fundamental difference between the tax treatment of partnerships and corporations for U.S. income tax purposes – i.e., partnerships are “flow-through” entities, whereas corporations are subject to an entity-level tax. As a “flow-through” entity, a partnership allocates its income or loss among the partners each year, which is reported directly on the partners’ own tax returns.
Consistent with this principle, traditionally, if a partnership incorrectly reported its income or loss in a given year, the adjustment would “flow through” to the partners in the same year. These partners would then be liable for any deficiency on their own tax returns as revised to include their share of the flow-through adjustment.
For tax years beginning after December 31, 2017, this will no longer be the case. As a result of changes made to the Internal Revenue Code by the Act, partnerships may now be directly liable for any tax deficiency resulting from an adjustment to partnership items (e.g., income, gain, loss deduction and/or credit). Thus, the current partners in a partnership could bear economic responsibility for improper tax reporting in prior years, even if one or more of such partners was not a partner in the year in which the improper reporting occurred.
This change is designed to make it easier for the IRS to assess and collect taxes against partnerships and is expected to raise $9.3 billion in additional revenue over 10 years.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.