IRS Asked to Help States by Clarifying Partnership Audit Regime

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By Che Odom

An influential tax group is asking the IRS to clarify how proposed regulations will implement certain aspects of the new federal partnership audit regime.

The Multistate Tax Commission, an intergovernmental state agency that develops model tax laws and regulations for states, submitted its request Aug. 14 in a letter to the Internal Revenue Service.

The group is seeking more details on the IRS’ proposed regulations for carrying out the 2015 Bipartisan Budget Act’s (BBA) ( Pub. L. No. 114-74) changes to the way partnerships are audited. The default regime generally provides for assessment and adjustments at the entity level, rather than among individual partners, and has generated questions and concerns over the flow-through impact at the state level.

States need clarification so that they may decide how to respond to federal rule changes, possibly by modifying their laws or regulations. Important to states, “who are analyzing how they will adapt to the new regime, is that they have the information as soon as possible,” according to the letter.

“Adapting to the new regime presents challenges for the states, just as it does for the IRS, taxpayers, and practitioners,” the letter said. “But much of the difficulty is inherent in the pass-through tax system and in complex partnership structures.”

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The IRS’ proposed regulations (REG-136118-15, RIN:1545-BN77) released June 13 are similar to a January proposal that was withdrawn when the White House announced a regulatory freeze shortly after President Donald Trump’s inauguration. The document navigates the new centralized partnership audit process enacted through the BBA, set to take effect in 2018.

Over the past 30 years, the passthrough business sector has grown rapidly, according to the Tax Foundation. Passthrough entities, such as partnerships and S corporations, earn more net income than traditional C corporations and employ the majority of the private-sector workforce, the Tax Foundation said in a Jan. 17 paper.

The majority of companies in the U.S. are passthrough businesses.

“The MTC recognizes that the growing use of these structures, and the potential for their abuse, necessitates centralized audits,” according to the MTC letter.

“We support IRS efforts to effectively implement the new regime, therefore, which will also benefit the states; while we also hope to avoid undue administrative and compliance burdens.”

CPAs React

The American Institute of CPAs also submitted a letter Aug. 14 to the IRS, making multiple recommendations related to the proposed regulations.

Among its comments, the AICPA recommended procedures allowing for the “push-out” election through tiered partnership structures. The AICPA also urged the IRS to expand the list of eligible partners for the opt-out election and suggested procedures for appointment and replacement of a partnership representative, among other changes.

To contact the reporter on this story: Che Odom in Washignton at

To contact the editor responsible for this story: Jennifer McLoughlin at

For More Information

The Multistate Tax Commission letter is at

The AICPA letter is at

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