January 28, 2016

New Partnership Audit Procedures May Dramatically Affect the Assessment and Collection of Taxes Relating to Partnership Activities

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The Bipartisan Budget Act of 2015 (the “BBA”), which was signed into law in November 2015, includes sweeping changes to the rules governing federal tax audits of entities treated as partnerships for US federal income tax purposes. The new rules replace the long-standing regimes for auditing partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and the Electing Large Partnership (“ELP”) rules.  The purpose of the new rules is to streamline partnership audits under a single set of rules and to make it easier for the IRS to assess and collect tax after a partnership audit. Importantly, the new audit regime will apply only to partnership tax returns filed for taxable years beginning after December 31, 2017 unless a partnership elects to apply them to an earlier taxable year. The BBA contains profound changes affecting both partnerships and partners. Consequently, a review of partnership agreements to analyze how these rules will affect existing partnerships is advisable.

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Michael Shulman

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Kristen Garry

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Derek Kershaw

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