In recent testimony at an IRS hearing, a member of the American Institute of CPAs (AICPA) Partnership Tax Technical Resource Panel took issue with several proposed regulations that would implement the Centralized Partnership Audit Regime.
Sarah Allen-Anthony, a tax senior manager at Crowe Horwath LLP, testified that the audit regime changes the way adjustments made by the IRS during an examination are accounted for by a partnership.
“A bedrock principle of partnership taxation is that all items of income and expense flow through to the partnership’s owners, including adjustments related to IRS audits,” she said. But the audit regime replaces that with a requirement that the partnership pays any additional tax due, which would create "significant administrative and accounting complexities,” she said.
The AICPA wants the IRS to allow the push-out of audit adjustments through a tiered partnership structure, Allen-Anthony testified.
“In general, we discourage establishing any limitations on tiers, dollar amounts, number of partners, or other attributes because those limitations may result in the partners paying inappropriate amounts of tax,” she said. “One of the main areas of increased complexity involves the effect of audit adjustments on each partner’s capital account and partnership basis.”
Here’s a snapshot of several issues that the AICPA wants and/or opposes.
- The AICPA opposes the appointment of a designated person to act on behalf of an entity partnership representative.
- A partnership should be able to revoke and replace its representative at any time, and the representative should be able to resign at any time. The IRS has established procedures for tracking Power of Attorney designations that they could modify to accommodate the necessary tracking. The AICPA is concerned that a previously designated partnership representative could discontinue a business relationship with the partnership, no longer qualify as an eligible person, die, or become an adverse party in relation to the partnership.
- A representative who resigns should not be able to appoint their own successor.
- The IRS should clarify that all partnerships be required to appoint a partnership representative on their timely filed tax return in order to protect the interests of both the IRS and the partnership.
- The audit regime doesn’t refer to an audited partnership’s right to challenge various determinations by the regime with the IRS Office of Appeals, even though the appeals process is a vital option for taxpayers to avoid Tax Court.
- The AICPA wants the IRS to establish a single unified appeals process for a partnership to challenge both the underlying adjustments and any denial of requested modifications.
- A partnership should be able to allocate audit adjustments that result in an imputed underpayment under sections 705(a)(1)(B) or (2)(B) in accordance with the partnership agreement of the reviewed year.
- Audit adjustments should be subjected to the existing “substantial economic effect” rules under section 704.
- For audit adjustments when the reviewed partner retains a partnership interest in the adjustment year, the following should apply: if the partnership opts to pay the underpayment or the partner elects to pay the safe harbor amount, the net adjustments for the reviewed and intervening years should be made to the partner’s capital account and basis in the adjustment year; and if the partner opts to file amended returns or recalculates their tax liability for the reviewed and intervening years following a push-out election, make the adjustments in the appropriate tax year and show that on each year’s amended return or recalculation.
- For audit adjustments when the reviewed year partner disposed of their partnership interest prior to the adjustment year, the following should apply: if the partnership opts to pay the imputed underpayment or the partner elects to pay the safe harbor amount, the net adjustments for the reviewed and intervening years should be made to the adjustment year partner’s capital account and basis in the adjustment year; and if the partner opts to file amended returns or recalculates tax liability for the reviewed and intervening years including the year of disposition, adjustments should be made in the appropriate tax year and reflected on each year’s amended return or recalculation.
The AICPA has recommended a year’s delay in implementing the audit regime.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.