Posted by Elliot Kravitz, ATP

Auditing rules for Partnership – What you need to know

Auditing rules for Partnership – What you need to know

In 2015, Congress adopted a centralized audit regime for the partnership (the partnership audit rules) that assesses and collects federal taxes due to a partnership-wide audit entity. In December 2018, the Treasury and the IRS published a final regulation implementing the partnership's examination rules (TD 9844). The final by-law applies to companies for taxation years starting after December 31, 2017, and ending after August 12, 2018, as well as companies that choose to utilize the company's audit rules for taxation years of the society. 

The final regulations primarily reproduce a proposed regulation published in August 2018 (83 FR 41954), with some elements of clarification. The most important aspects of these clarifications are discussed below.

Partnership Related Items

The partnership audit rules apply to any "partnership related item." This term includes any article or sum linked to the partnership, which is relevant for determining the tax liability of any person and the distribution share of any partner. 

The final regulations specify that the articles or values relating to the company's transactions are articles or values linked to the company only if these articles or values are indicated or must be displayed in the declaration of the company or if they must keep the books and registers of the partnership. 

Therefore, the items or values displayed or to be displayed in a statement from a person other than the business (or in that person's books and records) that results after the application of the Internal Revenue Code (article) to an article linked to the company and which takes into account the taking into account of the particular facts and circumstances of this person are not elements linked to the partnership and are therefore not determined at partnership level per the rules of audit of the partnership. 

However, as mentioned above, the items reflected in the corporation's tax return or maintained in the corporation's books and records are related in some way to the corporation. For example, while a secret sale would only be taxable to the contributing partner, determining whether a partner sold assets to a business would require an audit of the entire business, even if the sale were a taxable event for the partner, this is where it starts because the property subject to the analysis of the sales secret is kept in the books and registers of the company.

Concerning articles, book values , or partnership registers, the expression "compulsory maintenance" has been added to exclude items that may be kept voluntarily in partnership books and registers. For example, a company may choose to keep the external database of each of its partners in its books and records, even if the Code does not require that the company maintain this information. The final regulations state that the voluntary registration of an article in the books of the company does not determine the meaning of the expression "article or value to which the company refers." A business cannot convert an article or quantity that does not refer to the partnership into an article or volume of partnership by merely including that article or number in the books and records of the partnership.

Each Partners Return Must Be Consistent With The Partnership Return

The partnership's audit rules require that a partner's performance be consistent with the performance of the company. To simplify that this condition applies to the return of each partner, the final regulations provide that the term "return of the partner" includes any declaration, calendar, or list and any modification or completion made by the partner about any requirements imposed by the Code. Consequently, a partner, in an original or modified declaration, must treat the articles relating to the partnership in a manner consistent with how these articles were treated in the company declaration presented above.

Partners who do not maintain this consistency risk that the IRS treats this discrepancy as a mathematical error and assesses an adjustment.

Despite the treatment as mathematical errors, as long as a partner informs the IRS of the inconsistent management of an article related to the company, by attaching a declaration to the performance of the partner in which the article returned to the company is treated inconsistently, the consistency requirement (and the effect of inconsistent processing) does not apply to this element linked to the partnership. 

The final regulations specify that the term "return of members" for these purposes includes any modification to the initial declaration of membership. When a partner in an amended declaration deals with a business-related article, unlike the way the article was treated in the business declaration, the partner is requesting an administrative adjustment of the business-related article' business.

The last regulations provide that a partner cannot inform the IRS that it manages an article incompatible with the company's declaration during a fiscal year after the IRS has sent a notice of administrative procedure of the business concerned. This rule specifies that, since the IRS initiates administrative proceedings in the context of a partnership taxation year, any adjustment to a company-related element for that year must be determined only in the context of this procedure at the company level. Neither the company, when submitting an administrative adjustment request, nor the partner, who takes an inconsistent position, can adjust a business-related item outside of this procedure. If the company takes any action, any final decision of the method binds the company and all its partners.

Insufficient Payment

Article 6225 (b) (1) (B) provides that the determination of any imputed payment must be made "by applying the highest rate in force during the year analyzed in articles 1 or 11." The prelude to the final regulations states that the mandate is unequivocal and that there are no exceptions for a specific partnership or a particular type of partner. To take into the reckoning, the unique circumstances of specific partners, a business and its partners may request changes to section 6225 (c). 

For example, the company may require changes in the company's adjustments attributable to a tax-exempt entity or the context of adjustments to profits or qualified dividends allocated to an individual. Also, society can make "evicted" choices under section 6226, allowing members to pay taxes using the individual marginal tax rates, including relative to individual partners, taking into account the alternative minimum tax.

The purpose of the amending provisions is to determine an imputed payment amount that reflects, as precisely as possible, the tax that the partners would have paid if they had correctly reported the corrected items while maintaining the efficiency of a collection and collection process simplified exam. According to the final regulations, a partnership can request changes compared to the partners of the year under review (direct partners), including transitional and indirect partners. However, a business cannot require changes from a direct or indirect partner, which is a wholly-owned entity that is not considered separate from its owner for federal income tax purposes.

Push-Out Election

Failure to comply with the company's audit rules is that the company must pay all imputed payments resulting from the company's adjustments. However, a business can make choices in accordance with article 6226 ("push-out election") to transfer the change for non-payment to its partners. An expulsion choice applies to all partners and must be made within 45 days of the date on which the IRS submits the final notice of adjustment to the partnership. These 45 days cannot be extended, and, once made, the election can only be revoked with the agreement of the IRS.

A business that conducts push-out elections must provide each revised partner for the year with a statement reflecting the partner's participation in the business adjustments associated with the imputed insufficient payment for which the election was held. If a business detects an error in a return within 60 days of the expiration date of the performance, the business must correct the error and can do so without approval from the IRS. If a company detects a mistake more than 60 days after the expiration of the declaration, it can only correct the error after receiving the IRS agreement.

Elliot Kravitz, ATP
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