Partnership Game Changer

Enacted November 2, 2015, the Bipartisan Budget Act of 2015 changed the partnership audit rules, projected to raise $10 billion to balance this budget.  The mandated effective date is with the 2018 Form 1065 Partnership and LLC tax filings Earlier adoption by the entity is allowable for 2016 and/or 2017 and for some short-year 2015 entities.  see Election into the Partnership Audit Regime Under the Bipartisan Budget Act of 2015.

The thee audit rules that are still allowed to be in effect though the 2017 tax returns are:

  1. Entities with more than 10 partners are audited under the TEFRA procedures and the entity’s audit results are then binding on each individual partner, without any opportunity for an individual appeal.
  2. Entities with more than 100 partners that elected to be treated as Electing Large Partnerships (ELP) are similar to TEFRA, but the partners adjustment is reported on his current-year tax return, rather than an amended return for the year that was under examination.
  3. Entities with less than 11 partners are audited as part of each individual partner’s own personal audit.

Effective with 2018, TEFRA and ELP are repealed.  IRS examinations will result in any taxes being payable by the entity itself, and not payable by each individual partner, as was the case in each of the above procedures.  This change can have significant consequences for partners, especially those exiting or entering or merging with an existing entity structure.

For numbers 1 & 3 above, there is an opt-out process.

The “Tax matters partner” is passé and is being replaced with a “Partnership representative”

Partners do not have joint and several liability for the partnership-level liability