Global Tax Adviser, November 24, 2015. The U.S. government has enacted new audit procedures for partnerships that make substantial changes to way that partnerships are audited and taxes are assessed and collected. The new rules, which were proposed in the 2015 U.S. budget and signed into law on November 2, 2015, effectively allow the IRS to assess and collect tax, penalties, and interest attributable to audit adjustments at the partnership level instead of the partner level. The new partnership audit procedures are generally effective for tax years beginning on or after January 1, 2018, although partnerships may elect to apply the provisions before that.
As a result of these changes, U.S. partners and partnerships should evaluate their relationship and amend partnership agreements as necessary to address how decisions on the elections will be made before the rules come into effect in 2018. Similarly, investors considering investment in a partnership will want to review these agreements and, if there is no requirement that the election to flow through adjustments to prior partners be made, will want to perform a tax due diligence on prior year partnership returns (starting after the effective date) for which they may be liable for any tax deficiency assessed during their ownership.
Generally, under the new U.S. rules, the IRS can make an assessment at the partnership level, at the highest tax rate, and this flows through to current partners. Although an election is available that would allow the partnership to issue amended K-1s to the partners for the year under audit, this comes at a cost of an interest rate at 2% higher than otherwise.
The new U.S. audit and adjustment regime applies to all partnerships, except for certain qualifying partnerships that affirmatively elect out for a tax year.
For more information, contact your KPMG adviser.
Information is current to November 24, 2015. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500