The Internal Revenue Service (IRS) on June 13, 2017, re-released proposed regulations that would overhaul how partnerships are audited. While these proposed rules were originally proposed on January 18 and temporarily withdrawn on January 20 per President Trump’s ordering a pause on all new regulations, they will now govern how partnerships will be audited.
Currently, the IRS generally holds individuals within a partnership responsible for their share of tax liability. Effective for taxable years beginning after December 31, 2017, the proposed rules would instead mandate that a partnership be audited at the entity, not the individual, level. Therefore, the partnership would be responsible for any additional taxes. Partnerships will be required to designate a representative to represent the entity before the IRS.
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. Unfortunately, the regulations do not fully address the issue of enabling a partner that is itself a partnership to push through adjustments to its own individual partners. NMHC/NAA are working to resolve this issue so that there are no cases in which one multifamily partner becomes liable for another partner’s tax obligations. Noting its concerns about allowing such push outs through multiple partnership tiers, the IRS said it is considering approaches on how to address this issue that will be the subject of regulations to be proposed in the near future.
NMHC/NAA are also focused on securing a legislative solution that would require partnership push outs of tax liabilities. Congressional tax writers introduced bicameral technical corrections legislation on December 6, 2016, that would address the treatment of tiered partnerships by specifically allowing downstream partnership to remit amended K-1s to its own individual partners. 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.
NMHC/NAA have long worked to ensure that the partnership audit process does not disadvantage multifamily industry participants or unintentionally disturb investment. NMHC/NAA requested and an extremely beneficial change to original partnership audit proposal introduced in Congress in 2015. That proposal would have made all partners jointly and severally liable for the entire partnership’s tax liability. This would have curbed investment because a partner wouldn’t want to participate in a partnership with essentially unlimited tax liability. This proposal was removed and is a significant benefit to the real estate industry.
More information on the proposed technical corrections legislation 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