The American Institute of CPAs has written a letter to the Internal Revenue Service and the Treasury Department asking them to postpone the effective date of the centralized partnership audit regime for one year until the end of 2018.
Congress signed into law a budget deal in November 2015 that included a provision making it easier for the IRS to audit large partnerships, such as hedge funds, private equity firms and accounting firms, allowing the IRS to audit the partnership itself instead of being forced to audit each individual partner (see Budget deal makes it easier for IRS to audit large partnerships). The new rules have been a continuing cause of concern for many accounting firms and partnership clients. The AICPA has previously written to the IRS and the Treasury asking for more guidance and a delay on comments, and for Congress to extend the deadline (see AICPA wants IRS guidance on new partnership audit rules, AICPA asks Congress for changes on partnership audits, and AICPA urges IRS to extend comment deadline on new partnership audit regime).
In a letter Tuesday, the AICPA outlined a number of concerns that would warrant a delay in the effective date for the new audit regime, including the fact that the necessary regulations haven’t been issued yet by the IRS. The IRS and the Treasury Department issued a set of proposed regulations in January, but later withdrew them after the incoming Trump administration imposed a temporary freeze on new regulations. However, the AICPA argues that even if CPAs were to follow the withdrawn regulations, they contained some significant gaps, such as on how to apply adjustments to partners’ outside basis and capital accounts, along with the partnership’s basis and book values. The Treasury Department reissued the proposed regulations Tuesday.
Congress introduced a proposed technical corrections bill in December, the Tax Technical Corrections Act of 2016, that would clarify and modify some elements of the new partnership audit regime, the AICPA pointed out. In addition, the AICPA noted that the impact on some financial reporting standards remains unclear, such as the accounting standards for contingencies and income taxes.
“There remains a significant lack of clarity and substantive disagreements among tax and accounting professionals on the question of whether payments made to the IRS as a result of examinations under the new Regime represent obligations of a partnership or merely payments by a partnership on behalf of its partners,” wrote AICPA Tax Executive Committee chair Annette Nellen in the letter. “Given the multitude of elections available to a partnership following an assessment under the new Regime, different and even multiple answers to that question are possible for each examination.”
The AICPA also pointed out that partnerships would need to amend or draft their existing partnership agreements for the new regime. The impact on state tax law also remains uncertain, the AICPA noted.
“This new Regime represents a significant departure from previous law,” Nellen wrote. “It will require a substantial effort on the part of Treasury, the IRS, the tax practitioner community and the affected taxpayers (which includes virtually every partnership and their partners) to develop and comply with new rules, regulations and procedures to establish a fair, equitable and administrable Regime.”
She observed that the process of developing the necessary framework for operating the regime is still in its early stages. “The AICPA believes that it is unlikely that all the procedures and guidance necessary for taxpayers to make informed decisions regarding its provisions will be established before the current effective date at the end of this year”.