Partnership Audits

Posted by Mary McNulty      Mary McNulty spoke at the University of Chicago Law School’s 67th Annual Federal Tax Conference on “Auditing Large Partnerships and TEFRA:  Where We Are and Where We are Going.”  Noel P. Brock, West Virginia University, presented his paper on this topic, and she and Bill Wilkins, Chief Counsel, Internal Revenue Service, commented on it.  Harvey Coustan moderated the panel.  Mary conveyed her experiences with about 10 TEFRA audits in the past three years.  All but two audits were conducted by the Large Business & International (LB&I) group of the IRS.  The audits focused on the taxable income of the partnership, rather than on allocations or subchapter K issues.  Mary commented on the delay caused by the extra TEFRA rules.  Such delays were mostly at either the beginning of the audit, when the notices of the beginning of the partnership audit (NBAP) were issued and the linkage with the partners’ returns was made, or at the end, when settlements were being documented.  Mary advised that the Internal Revenue Manual contains errors and inconsistencies in the sections on TEFRA audits, which cause additional delays.The consensus of the panel was that TEFRA should be revamped but not repealed.  An entity-level partnership audit can be simple, efficient, and easy to administer.  However, it becomes complicated because of the rights granted to individual partners for notice, to participate in the audit, to strike their own settlements, and to participate in judicial review.  The system will become more simple and easier to administer if these rights are cut back, especially for small and indirect partners.  Tiered entities are especially hard to audit.  The panel proposed an entity-level payment at some point in the tiers.  Then the burden would be shifted from the IRS to private parties to ensure that the tax burden is borne by the partners who realized the initial tax benefit, through representations, warranties, and indemnities.For previous postings on the issues presented with partnership audits, click here.