The current partnership audit regime, in effect since the Tax Equity and Fiscal Responsibility Tax Act of 1982 (TEFRA), created many sources of potential frustration. Among them: the determination of which partner could serve as tax matters partner; the necessity to distinguish between partnership items and affected items; and the inability of a partnership with, for example, only an individual and a disregarded entity as direct partners to take advantage of the small-partnership exemption. The good news for practitioners is Congress has repealed these rules, replacing them with new “partnership audit rules” applicable for the audits of returns for partnership taxable years beginning after Dec. 31, 2017. These rules in fact solve some of the frustrations of TEFRA.
The bad news is that there are many new uncertainties arising under these new rules. Despite the fact that the partnership audit rules will generally only be applicable for returns for partnership taxable years beginning after Dec. 31, 2017,1 attorneys drafting partnership agreements must worry about them now.
Small-Partnership Exemption
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