On June 13, 2017, the Internal Revenue Service (IRS) reissued a voluminous package of regulations (the 2017 Proposed Regulations) regarding the new partnership audit regime created under the Bipartisan Budget Act of 2015. The new partnership audit regime significantly alters the administrative procedures that apply to US partnerships and other entities (such as LLCs) classified as partnerships for US tax purposes. Among other things, under the new partnership audit regime, a partnership, rather than its partners, may be liable for US federal taxes, interest and penalties resulting from adjustments to partnership-related tax items. For additional information on the new partnership audit regime, see this Eversheds Sutherland legal alert. The new partnership audit regime generally applies to partnership tax years beginning after December 31, 2017.
As a general matter, the 2017 Proposed Regulations (which are nearly identical to regulations previously proposed in January 2017, but withdrawn after the inauguration of President Trump) clarify certain aspects of the new partnership audit regime but fail to address many taxpayers' concerns regarding the new regime.
Among other things, the 2017 Proposed Regulations clarify that the IRS intends to apply the new partnership audit regime broadly to "all items and information required to be shown, or reflected, on a return of the partnership ... and the forms and instructions prescribed by the Internal Revenue Service ... and any information in the partnership's books and records for the taxable year."
In addition, although a statutory option to elect out of the new partnership audit regime is available to certain partnerships with 100 or fewer partners and the statute permits the IRS to expand the availability of this election to a broader class of partnerships, the 2017 Proposed Regulations make it clear that the IRS, at least for now, does not intend to expand the class of partnerships eligible to make this election.
The 2017 Proposed Regulations also clarify that the partnership representative has the sole authority to act on behalf of the partnership in any audit or other proceeding and that the actions of the partnership representative will bind the partnership and all partners, including any partner that itself has properly elected out of the new partnership audit regime.
The IRS declined to address whether tiered partnerships would be permitted to utilize the statutory push-out election, which generally allows a partnership to elect to push out the liability resulting from partnership-level adjustments to the persons who were partners in the year under audit.
The IRS also declined to address the manner in which partnershiplevel adjustments are taken into account for purposes of computing the tax basis and the capital accounts of the partners.
It is possible that these and other issues will be addressed in future legislation. A technical corrections bill was previously proposed, but not adopted, by Congress. It remains to be seen whether taxpayers will receive additional clarifications prior to the effective date of the new regime.