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Wiley Rein Tax Lawyer Michael Grace Comments on New Partnership Audit Regulations

Wolters Kluwer’s Federal Tax Weekly
June 22, 2017

Michael J. Grace, consulting counsel in Wiley Rein’s Corporate Practice, was quoted and interviewed in the June 22 issue of Wolters Kluwer’s Federal Tax Weekly about recently proposed regulations interpreting the Centralized Partnership Audit Regime. Published in the Federal Register on June 14, 2017, the proposed regulations interpret amendments of the Internal Revenue Code by the Bipartisan Budget Act of 2015 (Pub. L. 114-74) as amended by the Protecting Americans from Tax Hikes Act (Pub. L. 114-113).

Under these new rules, the IRS, generally starting in 2018, will both examine partnerships and collect directly from partnerships themselves any determined underpayments of tax, penalties, and interest. Currently, under the Tax Equity and Fiscal Responsibility Act (TEFRA) Rules dating from 1982, the IRS generally can audit partnerships. However, the IRS then must attempt to collect any determined underpayments from the partners themselves. Under the updated rules, the IRS generally will collect directly from partnerships.

“These proposed regulations may satiate the relentless clamoring by some for ‘guidance’ (although the regulations are merely proposed),” Mr. Grace told Wolters Kluwer. He observed, however, that “the proposed regulations do not and realistically could not have been expected to answer many practical questions that tax practitioners and clients must answer in preparing for the new rules.” As noted in the article, Mr. Grace identified those issues to include:

  • Whether to elect out of the new rules (assuming a partnership is eligible);
  • Selecting a method of satisfying an imputed underpayment;
  • Allocating economic responsibility for an imputed underpayment among partners including situations in which partners’ interests change between a reviewed year and the adjustment year; and
  • Indemnifications between partnerships and partnership representatives.

Wolters Kluwer also interviewed Mr. Grace and published the interview in a “Practitioners’ Corner” accompanying Federal Tax Weekly. In answering the publication’s questions, Mr. Grace addressed among other topics under the new rules: scope of the rules, ability to elect out of the new rules, partnership representatives, and a partnership’s election to “push-out” examination adjustments to partners in lieu of the partnership itself writing a check to the IRS.

Mr. Grace recently spoke about the Centralized Partnership Audit Regime at the annual Taxation on Real Estate Conference sponsored by the Illinois CPA Society. He also has published a Bloomberg BNA Tax Management Memorandum on the rules: “New Partnership Auditing Procedures: Practical Responses and Drafting Strategies,” 57 Tax Management Memorandum (Bloomberg BNA) 403 (September 19, 2016).