Budget Deal Rewrites Partnership Audit Rules

The president on Nov. 2 signed a sweeping budget compromise into law that will replace the current partnership audit procedures with a new process that dramatically increases the payment and reporting responsibilities for partnerships.

The partnership provisions will profoundly affect not only pass-through entities, but also S corporations, C corporations and tax-exempt entities that are partners in partnerships. Under the previous law, a partnership subject to the rules under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) would determine any adjustments at the partnership level, and assessments would flow through to the partnership's partners. This procedure enabled the IRS to prevent partners from being treated unequally. However, it also required the IRS to locate and calculate the tax owed for each partner. Some large partnerships have thousands of partners.