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March 8 — If you're looking for clues about how the IRS will approach regulations for the new regime for partnership audits, you might want to look at how the agency ordered questions in a recent notice, a practitioner said.
“I don't think the order is an accident. I think it reflects the issues that are of greatest to least concern,” Michael Greenwald, a partner at Friedman LLP, said about Notice 2016-23. “I always assume that everything that comes out is deliberate, that the order in the notice reflects some higher thinking from IRS and Treasury versus just this list of things that came to mind.”
The Internal Revenue Service asked for comments in the March 4 notice about the new rules for auditing partnerships set to go into effect in 2018.
Getting It ‘Right.'
The top three of the IRS's 12 comment requests included how to define a partnership with fewer than 100 partners that is eligible to opt out of the regime, requirements for serving as the partnership representative and how to calculate an imputed underpayment (44 DTR G-8, 3/7/16).
“It's interesting that IRS, in an effort to get it right the first time, is asking the practitioner community about what they think should be in the regulations before the IRS even has draft regulations,” Greenwald told Bloomberg BNA March 8. “That's a positive thing.”
The new regime, implemented in October under the 2015 Bipartisan Budget Act (Pub. L. No. 114-74), 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; however, Notice 2016-23 requests comments on whether other entity types should be treated similarly to S corps.
IRS Chief Counsel William J. Wilkins has said the IRS could require additional time to figure out how to audit partnerships with fewer than 100 partners since the Bipartisan Budget Act nullified the Tax Equity and Fiscal Responsibility Act rules. Greenwald says he could see the agency issuing notices or proposed regulations in a piecemeal fashion to keep the process moving, despite staffing shortages at the IRS and Treasury Department (20 DTR G-6, 2/1/16).
Greenwald said he hopes the IRS will issue at least some proposed rules before mid-November, when the agency will take a hiatus from issuing regulations until a new treasury secretary comes into office. The IRS has several other passthrough entity proposals—management fee waiver rules, qualifying income for master limited partnerships, and disguised sale and partnership liabilities under tax code Sections 707 and 752—that it is pushing to make final before the end of President Barack Obama's administration.
The IRS asked for comments to be submitted by April 15, an unusually short turnaround for a request of this importance. The agency has noted this is a first step and there will be additional opportunities to comment as the rules move through the process.
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