Tax-related legislation often is included in the non-tax bills, and a new law – the Bi-partisan Budget Act of 2015-is one. On November 2, President Obama signed the 2015 Budget Act, which repeals the TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982) unified partnership audit rules and replaces them with streamlined procedures. The 2015 Budget Act does not, however, extend the so-called tax extenders, which will likely wait for Congressional action later this year.
Spending Cuts and Revenue Raisers
Four years ago, Congress passed and President Obama signed the Budget Control Act of 2011. The 2011 Budget Control Act imposed sequestration (across the board spending cuts) on federal spending for defense and non-defense programs. The 2015 Budget Act eases sequestration and avoids some of the deepest spending cuts.
To offset the additional spending, law-makers needed new revenue. Congress and the White House looked to TEFRA partnership audit repeal as a major revenue source. TEFRA repeal is expected to generate more than $9 billion over 10 years from enhanced compliance activities. Extension of pension stabilization is projected to raise $6.5 billion over 10 years. The Budget Act was approved by a vote of 266 to 167 in the House on October 28 and by a vote of 64 to 35 in the Senate on October 30; and signed into law by President Obama on November 2.
Partnership Audits – TEFRA
Before the 2015 Budget Act, three different regimes generally applied for auditing partnerships:
- Partnerships with more than 10 partners are audited under unified TEFRA procedures that are then binding on the partners;
- Partnerships with 100 or more partners that elect to be treated as Electing Large Partnerships (ELPs) are subject to a unified audit under which any adjustments are reflected on the partners’ current year return rather than on an amended prior-year return; and
- Partnerships with 10 or fewer partners, which are audited as part of each partner’s individual audit.
TEFRA partnership-level audit procedures apply to partnerships that have more than 10 partners. If any partner is not an individual, C corporation or the estate of an individual, or if any partner is a non-resident alien, the TEFRA unified procedure applies without regard for the number of partners. Since enactment, the universe of partnerships has changed. Partnerships have grown in number and complexity. The IRS often finds it hard to determine whether a partnership is a TEFRA Partnership. If the IRS applies the wrong procedures, it may jeopardize any assessment it makes.
Electing Large Partnerships
An Electing Large Partnership (ELP) is, for any partnership tax year, any partnership if the number of persons who were partners in the partnership in the preceding partnership tax year equaled or exceeded 100, and the partnership elects the application of the large partnership procedures. The audit procedures for Electing Large Partnerships are similar to TEFRA procedures in that adjustments to partnership items by the IRS are determined at the partnership level.
Repeal and Streamlined Procedures
Under the 2015 Budget Act, the TEFRA and ELP rules are repealed. In their place, the 2015 Budget Act provides a streamlined structure for auditing partnerships and their partners at the partnership level. Generally, the IRS would examine the partnership’s items of income, gain, loss, deduction, credit and partners’ distributive shares for a particular year of the partnership (the so-called “reviewed year”). Any adjustments would be taken into account by the partnership, not the individual partners, in the year that the audit or any judicial review is completed (the so-called “adjustment year”). The 2015 Budget Act allows partnerships with 100 or fewer qualifying partners to opt-out of the new audit regime. Partnerships that opt-out will be audited under the general rules applicable to individual taxpayers.
The 2015 Budget Act delays the effective date of TEFRA repeal to returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new regime to any partnership tax year beginning after the date of enactment (November 2, 2015).
As with all tax laws, the IRS will need to issue regulations and guidance about repeal of TEFRA and ELP rules.