Partnership-Level Tax Under New Audit Rules

The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, has significantly changed the partnership tax audit rules, effective for tax years beginning after December 31, 2017.

Under the current partnership audit rules, after an audit adjustment, the IRS must separately assess and collect tax from each partner. For large partnerships in particular, this can be a lengthy and administratively burdensome process for the IRS.

The new rules will impose an entity-level tax on a partnership that is subject to an audit adjustment (plus interest and penalties, as applicable). Unlike prior legislative proposals, however, partners will not be jointly and severally liable for the entire audit tax liability. The partnership will not be able to deduct this entity-level tax (or any associated interest or penalties). The partnership's tax liability initially is calculated by multiplying all net adjustments by the highest marginal federal rate (currently, 39.6%). The