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Dec. 13 — States struggling with uncertainty over the new federal partnership audit regime may want to adopt a wait-and-see approach as federal officials clean up the rules, according to the Internal Revenue Service chief.
As the wrinkles are ironed out at the federal level, IRS Commissioner John Koskinen said that “it will be a little unclear for a while for the states.”
“The general framework is fairly clear,” he said in a Dec. 13 interview with Bloomberg BNA. “And I think what they’re going to have to do is wait probably to see does a technical corrections bill go through that provides some greater clarity. And our regs we hope will complete the circuit.”
The Bipartisan Budget Act of 2015 ( Pub. L. No. 114-74), signed into law in November 2015, modified rules governing federal audits of partnership entities. The default regime provides for assessment and adjustments at the entity level—rather than among individual partners—absent an election that would transfer liability to the partners.
Prompted by questions and criticism regarding the law’s complexity, technical changes were introduced Dec. 6 in the Tax Technical Corrections Act (H.R. 6439, S. 3506), which reports indicate will likely pass in 2017. Likewise, Treasury guidance is anticipated next year.
Koskinen identified the “push-out election” as the primary source of ambiguity in the rules—including the mechanics of the election and which partnerships are eligible.
The push-out election under tax code Section 6226 permits a partnership to avoid the entity-level tax by pushing liability for an imputed underpayment to individual partners. It has generated a lot of pushback over its complexity, including from the American Institute of CPAs.
Koskinen said that the election may generate “a situation more complicated than TEFRA”—the former Tax Equity and Fiscal Responsibility Act partnership audit rules. However, once technical corrections and administrative guidance is finalized, he said that “we’ll be in better shape than we were.”
An impetus behind the new audit regime was lost collection opportunities for underpaid taxes from partnerships, which have been subject to record-low rates of federal audits that are resource-intensive and time-consuming.
By handling adjustments at the first-tier level of partnerships, Koskinen said the regime will improve efficiency for both the administration and partnerships. And in particular, audit coverage will increase.
“It won’t be a quantum leap forward,” he said. “But at least it will be an increase from what we were able to do before.”
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