Background – the New Audit RulesOn November 2, 2015, the New Audit Rules were enacted, effective for partnership taxable years beginning on or after January 1, 2018. These rules significantly changed the existing rules by requiring the partnership (domestic or foreign), rather than the partners in the year being audited, to pay any tax deficiencies and by limiting the rights of the partners to participate in the audit proceedings. The amount of any tax deficiency (the Imputed Underpayment) will generally be computed based on the highest tax rate applicable to an individual, but a partnership may claim a reduction in the tax rate based on certain types of income (e.g., capital gains and qualifying dividend income) and each partner’s status (e.g., tax-exempt). Certain partnerships with fewer than 100 partners may elect to opt out of these rules (the Opt Out Election), and partnerships that are subject to these rules are permitted to elect to push out the tax deficiency and tax payments to the partners that were partners in the taxable year that was being audited, thus saving the current partners from having to bear the cost of such tax. The New Audit Rules also no longer require the person representing the partnership in the audit proceedings before the IRS to be a partner in the partnership but permit the partnership to designate any person with substantial U.S. presence as its representative (replacing the old term “Tax Matters Partner” with the new term “Partnership Representative”). The Partnership Representative is given the sole authority to resolve any partnership audit and any such resolution will be binding on all partners. The Proposed Regulations provide much needed guidance on how these New Audit Rules will be applied.
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