New Partnership Audit Rules: Proposed Answers to Tough Questions

The Bipartisan Budget Act of 2015 (BBA) [Pub. L. No. 117-74, Section 1101] introduced a new centralized audit regime to be applied to all entities taxed as partnerships. Under the new regime, unless a partnership is able to elect out and affirmatively makes that election, the default rule is that audit, adjustment, assessment, and collection occur at the entity level. The new rules significantly change the partnership audit process and, quite possibly, the amount of tax liability paid and the persons ultimately bearing the economic consequence of that liability.

The new rules are effective for audits of returns filed for tax years beginning on or after Jan. 1, 2018. Under limited circumstances, a partnership may elect an early opt-in to the new rules.

This article uses a Q& A format to highlight many of the questions that exist with respect to the new centralized audit regime and explain the way in which the proposed regulations address those questions, if they do. Although these proposed regulations help navigate what is absolutely a sea change with respect to partnerships audits, there are still many important questions left unanswered, as discussed throughout this article. There is also no doubt that new questions will arise as practitioners work through these proposed regulations against the backdrop of an already complex area of tax law.

The article ends with a discussion of the challenges that exist for practitioners who are trying to address these rules as they negotiate and draft partnership agreements for entities taxed as partnerships.

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