IRS focuses on new partnership audit rules

Legislation enacted in 2015 provides new rules for IRS partnership audits. The new rules are a drastic departure from current rules and the IRS is hopeful that the rules will simplify the audit process and allow the IRS to conduct more partnership audits.

The provisions do not take effect until partnership tax years beginning on or after January 1, 2018, until an existing partnership may elect to apply the new rules to tax years after November 2, 2015. The IRS is working on guidance for the new audit regime and has requested comments by April 15, although agency officials said that comments after that date will be accepted.


Under current rules, as provided by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), when the IRS audits a partnership with more than 10 partners, the IRS determines any changes to the partnership return in a single administrative proceeding with the partnership. The partnership must designate a tax matters partner (the “TMP”) to handle the audit and any subsequent litigation. After determining the appropriate adjustments for the partnership as a whole, the IRS must recalculate the tax liability of each partner for the year under audit.

For partnerships with 10 or fewer partners, the IRS must audit the partner and the partnership separately. These small partnerships may elect to be audited under the TEFRA procedures.

Electing out


A partnership with 100 or fewer partners may opt out of the new regime. Partnerships that elect out will be audited under the general rules for individual taxpayers. Unlike the TEFRA regime, which applies TEFRA to partnerships with 11 or more partners, the new rules will not apply unless the partnership has over 100 partners. Thus, the IRS conceivably would have to conduct up to 100 audits of individual taxpayers.

The Tax Code requires that partners be individuals, C corporations, foreign entities that would be domestic C corporations, S corporations (special rules apply for counting owners as partners), and estates of deceased partners. The number of partners would be based on the number of Schedules K-1 issued by the partnership. The IRS may prescribe rules for treating other entities as eligible partners.

Partnership representative

Unlike the TMP procedures under TEFRA, the partnership will designate a partnership representative (PR) to deal with the IRS, who does not have to be a partner. The PR will have sole authority to act on behalf of the partnership. The partnership and all partners will be bound by the actions of the partnership. The new law does away with TEFRA rights for individual partners to receive notice of the audit and to participate in the audit. Partnerships could organize a group of partners to advise the PR.

Partnership/partner liability

The partnership will pay an IRS audit adjustment (the “imputed underpayment”) unless the partnership elects to provide each partner (and the IRS) with a statement of the partner’s share of the adjustment. Partnerships that pay the tax will provide amended Schedules K-1 to their partners. Thus, under the new law, the partnership will determine the partner’s liability for the increase in taxes that the partnership pays; under TEFRA, the IRS had to calculate the partners’ adjustments.

Written by

Steve Moss, CPA is a partner at Holden Moss CPAs and loves helping businesses and their owners grow to be the very best they can be. Our other offices include Raleigh, Oxford and Warrenton.

We are a little different at Holden Moss CPAs. While we still provide traditional tax and accounting services, years ago we realized many clients wanted help in running their businesses and were hungry for ideas, solutions, strategy, and execution. In response, we expanded our skill set and joined Ran One, a global network of business consulting firms. Our membership with Ran One gives us access to proprietary resources and analytical software to help our clients grow, become more profitable and valuable, and have the lifestyle they desire.

Now, blended into the fabric of our normal tax and accounting needs, we are focused on our clients’ businesses in a very different way. While our approach is not right for everyone, for those whom it is, incredible results may be obtained. Whether you have a new, or established, business, or for those in transition of selling or retiring, or for those who simply need to develop an exit strategy or succession plan, our unique approach to client service may be the edge you need.

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