“IRS Seen Able to Make Partnership Audit Adjustments Indefinitely”
Final regulations implementing the IRS’s new partnership audit regime should tighten the time frame in which the IRS can make audit adjustments, practitioners told the agency.
The statute and the IRS’s proposed regulations (REG-136118-15) are written in a way that appear to give the Internal Revenue Service an unlimited amount of time to make adjustments, Lee Meyercord, an associate at Thompson & Knight LLP who represented the State Bar of Texas tax section, said at a Sept. 18 IRS hearing on the regulations.
Tax code Section 6235(a) provides the period of limitations on making adjustments under the new auditing regime, which was enacted in the Bipartisan Budget Act of 2015. Paragraphs 2 and 3 in the statute base the period of limitations on the date that the IRS issues a notice of a proposed partnership adjustment (NOPPA).
However, “the statute and the proposed regulations don’t provide a time period in which the NOPPA must be issued, so the implication is that the IRS could issue a NOPPA at any time,” Meyercord said. David Colmenero, a partner at Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP who represented the Texas Society of Certified Public Accountants federal tax policy committee, expressed similar concerns.
Meyercord suggested requiring the IRS to issue the NOPPA within three years of the date a partnership return is due or filed.
If a change isn’t made, the regulations “would impose a significant incentive for partnerships to reorganize their ownership structure to allow them to be eligible to elect out of the centralized audit regime,” Meyercord said. This would reduce the number of partnerships the IRS is able to audit effectively, which is contrary to the intent of BBA, she said.
The BBA regime allows the agency to collect unpaid tax at the entity level—rather than among individual partners—absent an election that would push out liability to the partners. The new procedures will be effective Jan. 1, 2018.
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