The Budget Act of 2015, which was signed into law in November 2015, made major changes to the rules governing federal tax audits of partnerships. The legislative change repealed the partnership audit procedures commonly known as TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). Generally, a partnership with eleven or more partners at any one time during the partnership's tax year is a TEFRA partnership. TEFRA audits are subject to additional administrative procedures during an IRS audit.
The new rules allow the IRS to deal with only a single partnership representative during an audit. Unless the partnership opts out, the new rules impose an entity-level tax on the partnership at the highest rate of tax in effect for the year under review. The entity-level tax can be avoided if the partnership elects to pass the adjustments to its partners by providing them with adjusted Schedule K-1s reporting their share of any partnership-level adjustments. The purpose of the new rules is to streamline partnership audits under a single set of rules and to make it easier for the IRS to assess and collect tax after a partnership audit. The new rules apply to partnership tax returns filed for taxable years after Dec. 31, 2017. The partnership may elect to apply them to an earlier taxable year.
Because of this change and the affect it could have in situations where the 'flow through' partner is in a lower tax bracket, it is important to review whether or not the partnership should consider to opt out of this plan. For assistance with the new procedures, contact your local UHY LLP professional or visit us on the web at www.uhy-us.com.