In recent years, the number of large businesses organising partnerships has increased dramatically and Congress and others have expressed concern about the IRS’s ability to effectively audit these often complex organisations. In testimony before the Senate Permanent Subcommittee on Investigations, the GAO identified administrative challenges and associated costs of conducting partnership audits as a reason the IRS audits relatively few partnerships with assets in excess of $100m. In response to such concerns, the Obama administration and members of Congress (both Democrat and Republican) have proposed legislation to reduce or eliminate such impediments.

On 2 November, president Obama signed the Bipartisan Budget Act of 2015 (BBA) into law, effecting sweeping changes to the rules governing audits of entities treated as partnerships for US federal income tax purposes. The new rules are expected to increase partnership audit rates by simplifying how the IRS conducts audits and collects tax. Most notably, this includes imposing, by default, an entity-level tax on the audited partnership.

Although the legislation provides an overall framework for partnership audits, it leaves many questions in this complex area unanswered, including how the new rules may apply to non-US partners and partnerships. And while the legislation directs the US Treasury to iron out critical details in regulations, there is no specific deadline for the delivery of such additional guidance making it unclear whether (or when) clarifying guidance will follow.

Jan-Mar 2016 Issue

Ropes & Gray LLP