January 7, 2019 - Douglas Myser

Centralized partnership audit rules. These have changed at the IRS.  The statistics on partnership returns are overwhelming. Based on the data provided by the 2017 IRS Data Book and IRS bulletins the IRS has examined only 1% of partnership returns for FY 2017. Of course that will increase now that the IRS has been funding at appropriate levels for the first time in over a decade. Partnerships received over $586 billion worth of income in 2017. Centralized partnership audit rules.

The centralized partnership audit rules have perplexed the IRS and they have finally changed. The IRS has struggled to keep up with audits but due to past budget cuts and short staffing they have been overwhelmed with the workload. When the IRS audits a partnership, they were tasked with doing most of the work. The solution proposed to Congress was to shift more of the work to the taxpayer. The result is the Centralized Partnership Audit rules.

Prior to 2018 the audit guidelines were based on the Tax Equity and Fiscal Responsibility Act of 1982. The bipartisan budget act of 2015 replaced the old partnership rules with new procedures and new rules that effectively put the burden on the taxpayer and most of the work load on them as well. The new rules require adjustment of all items of income, gain, loss, deduction, or credit at the partnership level thereby making the partnership liable for any subsequent understatement of tax.

This shift in the audit procedures also places the burden on the partnership to produce the partnership basis schedules, and adjustments instead of the IRS manually tracking through the maze of partnership transactions. The default rule under the CPAR is that any tax resulting from the partnership exam is paid by the partnership. Two concerns have been expressed. One is that  partnerships pass through income. The other is that new partners may be liable for old partners tax debts. When this happens, the responsible partner can pursue Tax Relief with a Tax Resolution firm, such as the IRS Fresh Start Program