Why Did Congress Change Partnership Rules?
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A 2014 GAO study made striking findings regarding the audit rate of large partnerships: the IRS audited less than 1% of large partnerships, compared with audits of 27.1% of large corporations for the year 2012. And those audits yielded negligible results, often due to the extremely cumbersome manner in which partnership audits necessarily had to be conducted. Time and resources under the old system were devoted to determining who had the authority to represent the partnership in an audit, rather than actually conducting the audits. Simply put, it was a maze that the IRS often decided not to even try to navigate.
In 2015, Congress enacted sweeping changes to the way partnerships are audited, repealing the old partnership audit regime under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and enacting the Bipartisan Budget Act, or BBA. The BBA will significantly restructure the partnership audit process in many ways, including eliminating the role of tax matters partner required under the old TEFRA regime and creating a new, more powerful role of the Partnership Representative under the BBA regime. In addition, the BBA streamlines the audit and collection function to keep both at the partnership level.
The bottom line is that Congress wanted to create a more efficient way to audit partnerships, and to actually begin effectively auditing partnerships. Partnerships subject to taxation in the United States can expect a higher audit rate as the IRS implements the changes under the BBA.