Bipartisan Budget Act Creates Changes To Partnership Audit Procedures

The Bipartisan Budget Act ("the Act"), which President Barack Obama signed into law on Nov. 2, 2015, brings about significant changes to Internal Revenue Service ("IRS") audit procedures for all entities treated as partnerships under federal tax law. The Act's new rules apply to returns filed for partnership taxable years that begin after 2017, but partnerships may elect to have the new rules apply to returns filed after the date of enactment.

Since 1982, under rules commonly referred to as "TEFRA" (because they were enacted as part of the 1982 Tax Equity and Fiscal Responsibility Act), most partnerships are audited at the entity level rather than at the partner level. (Prior to 1982, all audits were conducted at the partner level.) However, the IRS must assess and collect each partner's liability individually. The Act replaces the TEFRA rules with a regime in which both audits and adjustments to tax liability are made at the partnership level, unless a partnership