New Law Clarifies Partnership Audit Rules

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Scope

The CAA clarifies the scope of the partnership audit rules. The new rules are not narrower than the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership audit rules; they are intended to have a scope sufficient to address partnership-related items. The CAA eliminated references to adjustments to partner-ship income, gain, loss, deduction, or credit, and replaced them with partnership-related items. “Partnership-related items” are any item or amount that is relevant to determining the income tax liability of any partner, according to the Joint Committee on Taxation (JCT). Among other things, partnership-related items include an imputed underpayment, or an item or amount relating to any transaction with, basis in, or liability of the partnership.According to the JCT, the partnership audit rules do not apply to withholding taxes except as specifically provided. However, any partnership income tax adjustment will be considered when determining and assessing withholding taxes when the partnership adjustment is relevant to that determination. Further, the technical corrections clarify that an imputed partnership underpayment is determined by appropriately netting partnership adjustments for that year and then applying the highest rate of tax for the reviewed year.

Pull-In; Push-Out

Also included in the CAA is a “pull-in” procedure, which allows for modifying an imputed underpayment without requiring individual partners to file an amended tax return. The “pull-in” procedure, if elected, would replace the “push-out” election. A “push-out” shifts liability to individual partners. The “pull-in” procedure contemplates that partner payments and information could be collected centrally by the IRS. However, the procedure permits the partnership representative or a third-party accounting or law firm to collect the data and remit it to the IRS.

Penalties

The partnership adjustment tracking report required in a “push-out” is a return for purposes of failure to file, frivolous submission, and return preparer penalties. Also, the failure to furnish statements in a “push-out” is subject to the failure to file or pay tax penalties. However, neither an administrative adjustment request nor a partnership adjustment tracking report are returns for purposes of the partner amended return modification procedures.