Partnerships and LLCs have grown in popularity given their governance flexibility, liability protection, special income and deduction allocations, and the single level of taxation they provide to partners. However, due to a lack of resources, the IRS only audits less than 1% of partnerships and collects little tax from these audits.

To make it easier for the IRS to audit partnerships and collect the tax, the Bipartisan Budget Act of 2015 was signed into law in November 2015, ideally resulting in a significant increase in tax revenue.¹

Although these new rules are effective for partnership tax years beginning after December 31, 2017,² a partnership may elect to apply the new rules to any partnership tax years beginning after November 2, 2015 and before January 1, 2018.³

The Bipartisan Budget Act contains some significant changes to the current audit standards; adjustments will be made at the partnership level and the resulting tax will be assessed and collected from the partnership. It also includes many elections and decisions that partnerships must consider in the event of a federal audit.

All partnerships and LLCs taxed as partnerships should carefully review certain tax provisions in their agreements to address these changes and avoid unintended tax consequences to the partners and partnership.

While proposed regulations governing these new partnership rules were issued on January 18, 2017, the Trump administration published a presidential memorandum two days later that put a freeze on all new regulations, which has delayed formal issuance of these new rules.

The rules are still scheduled to go into effect after December 31, 2017; however, many detailed questions related to the operation of these rules will remain unanswered until these regulations are issued and final. For now, the proposed regulations should be used as guidance.