US partnership audits

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Publication February 20, 2018

New partnership audit rules take effect in 2018.

Partnerships are not subject to US income taxes. However, the IRS is tired of chasing after partners for back taxes on their shares of partnership income. Some partnerships have as many as 10,000 partners. Therefore, starting this year, any back tax assessments imposed after an IRS audit will be collected from the partnership directly.

Most partnerships have a range of options, including electing out so that taxes are assessed on partners directly. This option may be used by partnerships with 100 or fewer partners, but it depends on the types of partners.

The IRS said in final regulations in December that partnerships cannot elect out of the new partnership audit rules if any of the partners is a partnership, disregarded entity or a foreign entity (unless the foreign entity is a corporation for US tax purposes).

Many partnerships are expected to choose a different, “push-out” election instead to leave audits at the partnership level, but push out any back tax assessments to persons who were partners in the year under audit.

Many partnership agreements need to be amended before year end to update the section on handling tax audits. Even recent partnership agreements often punted on the various choices while waiting for the IRS to fill in more detail in regulations about how the new rules will work. (For a more complete discussion of the subject, see “US Partnerships Get a Makeover” in the November 2015 NewsWire.)


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