Page 76 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
potential materially to affect tax liabilities by shifting the liability for adjustments to the partnership and adopting computational rules that ignore partner tax attributes and characteristics.
The new rules provide consolidated audit rules under which many partnerships are audited in a consolidated audit at the partnership level. The common theme of the new consolidated audit rules shifts the burden of making payment of additional income tax as a result of an Internal Revenue Service audit from those persons who were partners for the year under audit, and received the tax benefit from the tax item or items in issue, to the partnership in the adjustment year.4
The scope of adjustments made in a partnership audit under the new partnership audit rules appears to be narrower than the scope of adjustments made under TEFRA at the partnership level. Determinations under the new audit rules at the entity level are limited to “[a]ny adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof) . . . , any tax attributable thereto . . . , and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share.”
We now have three “old” audit regimes in effect at this time and two more (and a hybrid approach) under the “new audit” regime. The existing rules provide for the elective small partnership audit rules outside of TEFRA where audits are conducted on a partner-by-partner basis, the actual TEFRA audit rules, and the substantially ignored elective audit regime applicable to large partnerships. Under the new rules, the electing out of the consolidated audit rules, as discussed, below has been greatly expanded. If not electing or a partnership is not eligible to elect-out, then the partnership audit rules under the Bipartisan Budget Act of 2015 apply. The “hybrid” approach is a partnership level audit but the taxes attributable to the partnership level adjustments are paid at the partner level.5
One of the issues for the Treasury and the Internal Revenue Service, and foreseeably the courts as well, will be to set out in guidance or by court decision what issues will be handled at the partnership level and what issues
4 Payment by the partnership for the adjustment year indirectly is borne by the current partners, which set of partners may be different or hold different percentage ownership interests than the set of partners for the reviewed year or years.
5 I.R.C. § 6226(b).
© Terence Floyd Cuff and Jerald David August, 2016
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