Pre-TEFRA Partnership Audits Are ‘Uncharted Waters,' IRS Says

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Jan. 29 — The IRS might need some time to figure out how to audit partnerships with fewer than 100 partners after the Tax Equity and Fiscal Responsibility Act rules no longer apply, a top agency official said.

“Since validly electing partnerships will fall into pre-TEFRA rules, these are uncharted waters for partnerships of this size,” Internal Revenue Service Chief Counsel William J. Wilkins said Jan. 29 at the American Bar Association Section of Taxation midyear conference in Los Angeles.

The new regime, unveiled in October and set to take effect in 2018, makes it easier for the IRS to audit partnerships by collecting tax adjustments at the entity level, rather than from individual partners. The rules apply to partnerships with 100 or more members. Partnerships with fewer partners can opt out, so long as all the partners are individuals, estates, C corporations or S corporations (208 DTR G-2, 10/28/15).

More Eligibility, Please

Some practitioners pushed the IRS to include grantor trusts or partnerships with limited numbers of partners to the list, so that more partnerships aren't required to follow the new rules.

“It might take a while to get comfortable with managing this group of non-TEFRA partnerships before there is a comfort level with adding new categories of eligible partners,” Wilkins said.

The government is beginning the process of writing regulations to implement the regime. The IRS will issue a request for comments in the near term, said Ossie Borosh, an attorney-adviser in the Treasury Department's Office of Tax Legislative Counsel.

The first piece of guidance the IRS will publish will address how to elect to begin using the new regime before the rules fully go into effect in 2018, Wilkins said.

‘Less Than Meets the Eye.'

“I would advise everyone to read the early election language, and the surrounding effective date language, very carefully,” Wilkins said. “This election is less than meets the eye on first glance.”

There are several provisions, including the administrative adjustment request mechanism and the ability to push out the adjustment to the partners, that aren't available until the general effective date. It is widely thought that very few partnerships will opt in to the regime early.

“I would particularly urge you to not treat IRS burdens as a free good,” Wilkins said. “We need a system that works, and both tax collector and the taxpayers will need to tolerate some roughness and risk in order for that to occur.”

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