On December 15 the Internal Revenue Service (IRS) issued a proposed partnership audit regulation that addresses how partnerships can push out tax adjustments through multiple tiers of partners following an audit. Under the proposed regulations, each partnership in a tier can elect to either pay any tax adjustment at the entity level or push out that adjustment to its own partners.
NMHC/NAA have strongly supported allowing audited partnerships to push out adjustments through multiple tiers of partners. On August 11, the apartment industry sent a letter to the IRS requesting such treatment. Enabling multiple-tier push outs will help ensure that one partner does not become liable for another partner’s tax obligations.
As part of the bipartisan budget legislation enacted in late 2015, lawmakers sought to reformulate the partnership audit process to address the fact that large real estate partnerships are audited at much lower rates than corporations. Currently, the IRS generally holds individuals within a partnership responsible for their share of tax liability. The new law enables audits to occur at the partnership level, but it allows partnerships assessed additional taxes from an audit to allocate the resulting tax liability to individual partners.
Until the December 15 regulations, it was unclear if adjustments could be pushed through multiple tiers of partnerships. The new regulations specifically address the issue of enabling a partner that is itself a partnership to push through adjustments to its own individual partners. Non-compliant partners that do not either pay additional taxes due or push through liabilities to their own partners would remain liable for taxes owed.