TEFRA Partnership Audit Rules Repealed by 2015 Budget Act.
The Bi-partisan Budget Act of 2015, H.R. 1314, Title XI (“2015 Budget Act”) – signed into law on November 2, 2015 – repealed the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) unified partnership audit rules and replaced them with simplified rules. The 2015 Budget Act changes the audit procedures of partnerships (including LLCs taxed as partnerships), for returns filed for partnership tax years after December 31, 2017 (although, subject to certain exceptions, partnerships can elect to apply the new procedures earlier).
The new rules are supposed to make it easier for the IRS to audit partnerships (especially large partnerships which are partnerships with over 100 partners) and collect deficiencies as a result of partnership adjustments. Repealing TEFRA is estimated to generate approximately $10 billion over 10 years.
Before the 2015 Budget Act, the TEFRA audit procedures may or may not have applied to a partnership, depending on the size of the partnership or the types of partners. If the IRS failed to apply the correct audit procedures, it risked not being able to collect any potential assessment.
Under the 2015 Budget Act, the partnership (not the partners) is liable to the IRS for any deficiency based on an assumed tax rate. Accordingly, the current partners in the year in which the adjustment is made (the “adjustment year”) are essentially liable for the deficiency, not the persons who were partners in the year that was audited (the “reviewed year”). For example, under the new rules, a partner who acquired a partnership interest in, say, 2020 could suffer the economic cost of a 2018 tax liability imposed on the partnership.
The new rules do allow partnerships with 100 or fewer qualifying partners to opt-out of the new procedures. Partnerships that opt-out would be audited under the general audit rules applicable to individuals.
The 2015 Budget Act does not have an official legislative history so the Joint Committee on Taxation’s Blue Book summary will be essential in outlining the issues that the Treasury Department will need to address.
Practitioners need to advise clients on the consequences of these new procedures before the client enters into agreements for acquiring or disposing of a partnership interest and/or enters into a new partnership. Moreover, existing partnership agreements may need to be amended.