Did the IRS Fail?

A recent study released by the Treasury Inspector General for Tax Administration (TIGTA) estimated the IRS failed to assess over $14 million in taxes, interest and penalties for the year 2010. While this may not be large, it has caught the attention of Congress and the Treasury. One may think this is a failure of IRS administration, but in fairness, partnerships have become the preferred business entity over the last 20 years and the partnership audits process can be unwieldy and time consuming, resulting in prolonged audits.

Unified Partnership Audits Rules & Procedures Legislation

In 1982, Congress enacted a unified partnership audits rules and procedures legislation for all partnerships (TEFRA partnerships). There is a carve out for partnerships with 10 or fewer partners which are not flow-through entities, except estates for deceased partners. The expansion of a “tiered” partnership has been cited as one of the principal sources of audit failures. Thus, a recommendation that has been actively considered is to restrict or curtail partnerships investing in other partnerships. Tiered partnerships are very common in the private equity/hedge fund arena but are increasingly seen in real estate investments and estate planning.

Consequently, to avoid the failure of collecting the tax assessments from partnership audits is to require the partnerships to assess the taxes, interest and penalties rather than the partners. This will require a presumed statutory rate which would likely be high. This simplistic approach finds favor with many in Treasury, Congress, academia, etc.

What Does This Mean?

Changes may be coming and managing members of partnerships need to be aware of the interest this has drawn.

If this topic caught your attention and you would like to learn how potential changes may impact your partnership entities, contact me and we can discuss your specific situation.

Written by William Rewolinski, CPA, MST
Posted in Business Advisory, Tax