“What the Technical Corrections Mean for Partnership Audits”
Treasury and the IRS have already invested a substantial amount of time and energy drafting proposed regulations to the new partnership audit regime, but a recently proposed technical corrections bill would likely prompt a thorough revision of current plans and create new regulatory challenges.
The technical corrections include changes to section 6225(c) to allow reviewed-year partners to take adjustments into account so that the partnership’s imputed underpayment can be determined by the IRS without regard to that portion of the adjustments.
The new expressed intent of the modifications to the imputed underpayments rules is to determine the amount of tax due as closely as possible to the tax due if the partnership and partners had correctly reported and paid. “This is a change from the rough justice currently in the BBA to allow the IRS to efficiently collect tax due from partnership adjustments,” said Mary A. McNulty of Thompson & Knight LLP.
McNulty noted that under the BBA, an imputed underpayment may be reduced by the filing of amended returns by partners, but the IRS must first accept the amended returns. The technical corrections provide that the imputed under-payment should be reduced by the portion of the adjustments taken into account by the partners filing amended returns, as long as they satisfy specific requirements, including submitting any tax due along with their amended returns. Thus, the IRS no longer must review and approve the amended returns, McNulty said. However, the partners filing the amended returns must pay any tax due when they file them. “This strikes a fair balance between efficiency and collections,” McNulty said.
If a partnership fails to pay an imputed underpayment within 10 days of notice and demand, the IRS may assess and collect against adjustment-year partners for their proportionate share. That would make the partners severally, but not jointly, liable for the imputed underpayment, McNulty noted.