Primer on the IRS Partnership Audit Rules and How to Approach Them for Your Partnership

Insights November 2, 2017

In November of 2015 Congress replaced the rules governing audit procedures for partnerships (generally known as the TEFRA rules, for the Tax Equity and Fiscal Responsibility Act). These new rules are in the spotlight now because they are generally effective for partnership years beginning after 2017, and from a practical perspective, most partnerships need to decide how to handle these rules by the time they file their returns for 2018.

The main effects of these rules are as follows:

  • They require adjustment of all items of income and gain/loss deduction at the partnership level with the partnership itself being liable for any underpayment.  This mean the IRS can assess and collect tax at the partnership level.
  • They provide a way to elect out of this regime ONLY if (1) the partnership/LLC partners/members are individuals, estates of a deceased partner or S or C corporations, (2) the entity issues no more than 100 K-1s, and (3) the entity follows certain mechanics to make the election.

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Melinda Fellner focuses her practice on tax matters including federal, state and international tax. Her experience includes business structuring, acquisitions and reorganizations, and joint ventures and partnerships in both the domestic and offshore world. This experience includes negotiating and drafting operating agreements and drafting organizational and transactional documents for corporate transactions. More about Melinda