In November 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the Act). Among other things, the Act repealed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) audit procedures and introduced significant changes to how the Internal Revenue Service will audit partnerships. Effective for partnership tax years that begin after Dec. 31, 2017 — though partnerships may elect to apply the provisions earlier — section 1101(a) of the Act repealed the TEFRA audit procedures in sections 6221 through 6234 of the Internal Revenue Code (the Code). Sections 1101(b)(1) and 1101(b)(2) of the Act repeal the electing large partnership rules in sections 771 through 777 and sections 6240 through 6255 of the Code.
The TEFRA audit procedures are replaced by streamlined audit procedures in the new Code sections 6221 through 6241 that create a uniform set of rules for auditing partnerships and partners at the partnership level.
Under the new approach, the IRS examines the partnership’s items of income, gain, loss, deduction, credit and partner’s distributive shares for a particular partnership year (Reviewed Year). Any adjustments to the Reviewed Year are taken into account by the partnership rather than the individual partners in the year that the notice of final partnership adjustment is issued (Adjustment Year).
In the Adjustment Year, the partnership pays an imputed underpayment with respect to any adjustment. Any adjustment that did not result in an imputed underpayment would be taken into account by the partnership in the Adjustment Year as a reduction or increase in a nonseparately stated income or loss, respectively, or, in the case of a credit, as a separately stated item. The partnership would have the option to demonstrate that the adjustment would be lower if the adjustment was based on certain partner-level information, such as a partner’s marginal tax rate.
In lieu of making the adjustment at the partnership level, the partnership may issue adjusted Schedules K-1 to the Reviewed Year partners who would take the adjustment into account in the Adjustment Year through a simplified amended-return process.
In addition, the Act requires each partner treat each item of income, gain, loss, deduction or credit attributable to a partnership in a manner consistent with the treatment of such item on the partnership return. Under the Act, the IRS may treat any underpayment of tax by a partner by reason of inconsistent treatment as a mathematical error on the partner’s return, unless the partner attaches a statement that notifies the IRS of the inconsistency.
Similar to the current TEFRA audit procedures, the Act permits partnerships with 100 or fewer qualifying partners to elect out of the streamlined audit procedures and be audited under the general rules applicable to individual taxpayers. Qualifying partners include individuals, C corporations or foreign entities that would be treated as a C corporation, S corporations and estates of deceased partners. Partnerships with partnerships as partners cannot elect out of the new streamlined audit procedures.
To opt out of the streamlined audit procedures for a particular tax year, a partnership must file an election on a timely filed return with respect to such tax year. The election must disclose the name and taxpayer identification number of each partner. In addition, the partnership must notify each partner of such election. The manner of the disclosure and notification will be prescribed by the Secretary in forthcoming regulations.
Changes to Affordable Care Act automatic enrollment
Under the Affordable Care Act, employers with more than 200 full-time employees were required to automatically enroll new full-time employees in one of the employer’s health benefits plans. Section 604 of the Act repeals this automatic enrollment requirement. Employers may choose to automatically enroll new full-time employees, but are no longer required to do so.
The Act also authorizes the use of automated telephone calls to collect debts owed to the U.S. government. Regulations will be promulgated within nine months, so it is unclear at this point how the IRS will proceed with debt collection. If the IRS chooses to collect federal tax liabilities through automated calls, there is an increased risk of schemes designed to defraud taxpayers through IRS impersonation. With the already high level of identity theft, it remains to be seen how the IRS reconciles its new ability to collect debts via automated telephone calls and the countervailing interest of protecting taxpayers from fraudulent activity.
Partnership interests created by gift
Finally, the Act includes an amendment to section 761(b) of the Code which clarifies that a person is treated as a partner in a partnership in which capital is a material income-producing factor whether or not such interest was obtained by purchase or gift and regardless of whether such interest was acquired from a family member. This provision provides a general rule with respect to who is recognized as a partner in a partnership.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.