The Internal Revenue Service (IRS) on January 18, 2017, proposed new regulations that would overhaul how partnerships are audited. While these rules have since been withdrawn per President Trump’s ordering a pause on all new regulations, it is uncertain whether they will ever be implemented. However, since partnerships play such a central role in the multifamily industry and because this version of the regulations will likely provide a baseline if these rules are ultimately finalized, it is worth understanding how these regulations could impact the auditing of partnerships if enacted.
Currently, the IRS generally holds individuals within a partnership responsible for their share of tax liability. The proposed rules would instead mandate that a partnership be audited at the entity, not the individual, level. Then, the partnership would be responsible for any additional taxes. Notably, the proposed regulations provide an option that would allow partnerships to remit amended K-1s to the individual partners instead of paying tax at the partnership level. The proposed regulations are generally effective for taxable years beginning after December 31, 2017.
Congressional tax writers introduced bicameral technical corrections legislation on December 6, 2016, that would give the IRS additional flexibility in implementing the new audit regime. The bill clarified the scope of adjustments subject to audit, offered additional options for how partners can remit additional taxes that may be due after an audit and addressed the treatment of tiered partnerships. Although the technical corrections have not yet been reintroduced in the 115th Congress, they will likely serve as a baseline for action in 2017
The proposed regulations are a result of bipartisan budget legislation enacted in late 2015 that was designed to set spending levels and increase the nation’s debt ceiling. 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.
More information on the proposed regulations can be found here.
- 2019 Legislative and Regulatory Advocacy
- Bipartisan Multifamily Depreciation Bill Introduced
- IRS Delays Implementation of New Partnership Tax Forms
- Real Estate Industry Multifamily Depreciation Parity Act Letter to House and Senate – December 2019
- Real Estate Group Letter to IRS Regarding New Partnership Tax Forms – November 2019