As the IRS is increasing the attention on partnership returns, especially those with higher asset value or more complexity, we should keep into consideration the first results of the partnerships audits subject to Bipartisan Budget Act that are now ending.
The Bipartisan Budget Act (BBA) was passed in 2015, but it was effective from 2018. Back in 2018, there were changes to the partnership returns where a partnership representative (or tax matter partner) needed to be selected to handle tax issues, like a potential IRS audit being the point in contact if no representative like a CPA, EA or attorney is selected using a Power of Attorney.
Note that this selection is extremely important as “… under the BBA, the partnership representative is permitted to take many actions, such as settle audits, agree to extend the statute of limitation, make any relevant elections, and seek judicial review of IRS adjustments. Once the partnership representative makes such a decision with respect to an audit, the decision is final, and no partner has the right to contest it under the BBA.” and “… Furthermore, Sec. 6231 requires the IRS to mail notices of audits and notices of proposed and final adjustments to the partnership and the partnership representative but not to the partners themselves. Therefore, some partners might not even be aware an audit is taking place.” Additionally, in some cases, the operating agreement for the partnership was amended to make reference to the partnership representative.
In general, the partnership had to follow the BBA (note that in some limited cases the entity could opt out), which brings us to the most important change for partnership under these rules. Since 2018, the partnership is the one responsible for any taxes due from the audit procedures, while in the past was assessed at the partnership level due to the flow through character of these entities (partnership pay no income tax). As mentioned in the detailed article, there are several disadvantages that might impact the partners: “… First, having the partnership pay the imputed underpayment may result in economic distortion among the partners.“, “… Second, if a partnership simply pays the tax attributable to an imputed underpayment without taking any further action or making any elections, it may end up significantly overpaying the tax, compared with the tax that the partners would have owed if the partnership had correctly determined its income in the first place.” among other potential drawbacks.
However, there is also the “push-out” election within 45 days making the tax due liable at the partner level, but it generates an additional 2-percentage-point penalty.
This is a complex topic as an Act approved back in 2015, took effect in 2018 and almost a decade later we are seeing how these audit procedures are performed and the related outcomes. We recommend that professional guidance should be followed as each case might be different.
The Tax Adviser post – What accountants need to know about the BBA
