The Bipartisan Budget Act of 2015, Public Law No. 114-74 (Nov. 2, 2015), signed into law on Nov. 2, 2015, has significantly changed the partnership tax audit rules, effective for tax years beginning after Dec. 31, 2017 (Budget Act). Under the current partnership audit rules, after an audit adjustment, the Internal Revenue Service (IRS) must separately assess and collect tax from each partner. See generally IRC §§6221 to 6234. For large partnerships in particular, this can be a lengthy and administratively burdensome process for the IRS. The new rules impose an entity-level tax on a partnership that is subject to an audit adjustment (plus interest and penalties, as applicable). However, partners are not jointly and severally liable for the entire audit tax liability. The partnership is not able to deduct the entity-level tax (or any associated interest or penalties). The partnership’s tax liability initially is calculated by multiplying all net adjustments by the highest marginal federal rate (currently, 39.6 percent).
The partnership may then take certain actions to try to reduce this initial calculation, or the partnership may elect for each of its partners to pay their respective shares of the tax, rather than the partnership itself. In either case, the burden of the partnership audit under the new rules shifts significantly from the IRS to the partnership, which may increase the number of partnership audits by the IRS.
