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The American Institute of CPAs sent a letter Friday to the Internal Revenue Service with 40 recommendations that it wants the IRS to consider when drafting guidance on a new regime for auditing large, complex partnerships.

Troy Lewis

Budget legislation passed by Congress last year established a new partnership audit regime that will make it easier for the IRS to audit large partnerships, such as hedge funds and private equity firms. Instead of needing to audit each individual partner, which can be costly and time-consuming for the agency, the IRS will be able to assess and collect any determined underpayment of tax directly from the entire partnership, subject to certain available elections.

Those elections include permitting certain partnerships to opt out of the regime, along with an election for partnerships to push out the responsibility for payment of any assessment imposed to its partners. 

Implementing the new partnership audit regime, according to the AICPA, will mean balancing a simplified assessment and collection process that’s imposed at the partnership level against the general expectation that taxes should be imposed only on the appropriate taxable individual or entity, only on the properly calculated amount of taxable income and only at the appropriate tax rate.

The letter, from AICPA Tax Executive Committee chair Troy Lewis, focuses on the new IRS procedures that will happen before the agency begins an examination, between the time when an assessment is proposed and made final by the examiner, along with the IRS’s decision on which individuals and entities are ultimately responsible for paying the appropriate share of an assessment.

The AICPA made specific recommendations on issues related to the small partnership opt-out, the selection of a partnership representative, modifications of imputed underpayments, the election to push out adjustments to the partners and filing Administrative Adjustment Requests with the IRS.

The AICPA said its recommendations are designed to balance the IRS’s desire to simplify the assessment and collection of audit adjustments from complicated multitier partnership structures with the Tax Code’s basic principles of fairness and equity.

A subsequent letter from the AICPA will address other areas of concern for the Institute, including the impact of the new regime on substantive Subchapter K tax issues related to Subchapter S corporations, along with state-level tax adjustments that result from partnership audits under the new regime.

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