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Oct. 25 — The Internal Revenue Service is looking at a number of ways the new partnership audit regime may affect tax-exempt organizations, an agency official said.
Certain partnerships with 100 or fewer eligible partners, which include tax-exempt organizations, can opt out of the regime, and there needs to be “clarity about what that means,” said Janine Cook, deputy associate chief counsel at the IRS Tax-Exempt and Government Entities Division. She said a “huge contingency” in the general counsel’s office is dealing with the new procedures, created by the Bipartisan Budget Act of 2015 (Pub. L. No. 114-74).
That law allows the IRS to conduct examinations and collect adjustments at the entity level instead of from individual partners. The Treasury Department is crafting regulations for the audit regime, which takes effect for tax years after Dec. 31, 2017. The IRS issued temporary (T.D. 9780) and proposed (REG-105005-16) regulations Aug. 4 that describe how to make an early election under the regime, which is intended to make the audit process easier for the agency.
A partnership’s net adjustments for the reviewed year, the imputed underpayment, will be taxed at the highest corporate tax rate under the rules. There is a modification that can be done if a tax-exempt partner paid unrelated business income tax, something the IRS is also considering, Cook said at an Oct. 25 TEGE Council–Gulf Coast Exempt Organizations Update.
Exempt organizations are “super concerned” about the impact of the regime, particularly about the risk that a partnership could be stuck with an imputed underpayment for a departed taxable partner, Kat Saunders Gregor, a partner at Ropes & Gray LLP, told Bloomberg BNA.
“Are they going to end up paying the tax of some other partner? This cross-liability question is a huge deal. That’s why a lot of exempt organizations are really negotiating hard,” she said Oct. 25.
Exempt organizations are struggling with the decision of whether to force mangers to make a push-out election, which protects them from the risk of paying tax for other individuals but brings with it a higher interest rate, she said. If there isn’t that risk for an organization, and there is unrelated business income tax to be paid, an organization may be better off doing it through the partnership itself, she said.
Another issue the IRS is considering is whether it is private benefit for a partnership to pay tax owed by an individual who left the partnership—an area where it would “be nice to have clarity” that an exempt organization won’t face penalties if it is required to pay someone else’s tax and isn’t abusing the code, Gregor said.
“It would seem a bit unfair, sort of like they’re getting hit with a double whammy,” she said. “They’re potentially paying someone else’s tax and risking their own tax exemption as a result.”
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