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Signed into law in November of 2015, the Bipartisan Budget Act of 2015 made sweeping changes to the way partnerships are audited. These changes apply for tax years beginning after Dec. 31, 2017 and are intended to simplify the audit process for the Internal Revenue Service (IRS).

The most significant change allows the IRS to assess any change from an audit, and collect the resulting tax effect, at the partnership level. Under previous law, the IRS would follow the adjustment through to the individual partners to collect any changes in tax. The payment made by the partnership is a nondeductible expense.

What can be done?

  1. Partnerships with 100 or fewer partners (none of which are partnerships themselves) can "opt out" of these new provisions by making an annual election on their timely filed tax return. A partnership that opts out, is subject to the standard audit procedures.
  2. If the IRS audits a particular year and the partnership did not opt out for the tax year under audit, the partnership may still make a "push out" election within 45 days after the notice of final adjustment is issued. This election passes through the adjustment to each partner who was a partner during the year under audit in his or her applicable share. All penalties and interest are also paid at the partner level. 

Without these options, it is possible for a partner in the current year to recognize the adjustments from an audit of a period in which they were not a partner. 

Because of the potential adverse consequences, it is important to:

  • Review existing operating agreements for compliance with the new Act;
  • Consider including language for when the partnership will opt out or make the push out election;
  • Account for these provisions when purchasing an interest in a partnership.

This Act contains other provisions not discussed in this article. Please consult your tax professional at UHY Advisors in one of our many locations for more details.