How You May Be Affected by the Changes to Partnership Audit Rules - April 16, 2018 - Summary

Sep 19, 2026

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Explains how the Centralized Partnership Audit regime created by the Bipartisan Budget Act affects partnership agreements and IRS interaction for returns covering taxable years beginning after December 31, 2017. Details general reporting duties for partnerships, contrasts prior TEFRA unified audit rules with the new centralized system, and describes how taxes and penalties are assessed and collected at the partnership level. Includes a comparison of key changes, such as the move from a Tax Matters Partner to a Partnership Representative and the shift in notice practices.

LanguageEnglish

CategoryLetters

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Pages4

Reading Time2 min

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Reporting Requirements of Partnerships Generally

Prior Partnership Audit Rules - TEFRA Unified Partnership Audit Rules

New Partnership Audit Rules - Centralized Partnership Audit Regime

Comparison of Key Changes

Representative

Notice

View Original Format Kendra Merchant (Miles & Stockbridge) alerts partnerships to recent changes to the Centralized Partnership Audit regime and how it will impact the ways they structure their partnership agreements and the way they interact with the IRS, including reporting requirements and audit rules, as well as a comparison of the key changes to the regime. Miles & Stockbridge First published on the Finance & Capital Markets Blog How You May Be Affected by the Changes to Partnership Audit Rules April 16th, 2018 By Kendra H. Merchant In 2015, Congress passed the Bipartisan Budget Act that created a new Centralized Partnership Audit regime that is effective for income tax returns filed of partnership taxable years beginning after December 31, 2017. These new changes will impact the ways partnerships structure their partnership agreements and the way they interact with the IRS. I. Reporting Requirements of Partnerships Generally For federal income tax purposes, a partnership is not a taxable entity. Instead, a partnership is a conduit, and the items of partnership income, deduction, gain, loss, and credit are taken into account on the partners' income tax returns. A partnership is required to file an annual information return setting forth items of partnership information necessary to carry out the income tax (Form 1065) and to furnish to each partner a statement of such partnership information as is relevant to the partner's income tax (Schedule K-1) . II. Prior Partnership Audit Rules – TEFRA Unified Partnership Audit Rules The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established unified rules. These rules required the tax treatment of all “partnership items” to be determined at the partnership level in a single administrative proceeding, rather than the partner level. Partnership items are those items that are more appropriately determined at the partnership level than at the partner level. Any item that is affected by a partnership item (for example, on the partner's return) is an “affected item.” Affected items of a partner are subject to determination at the partner level. Upon completion of partnership-level determinations, the IRS collected tax from each partner separately with respect to deficiencies at the partner level. Under prior law, the IRS was required to audit each partner separately, which lead to multiple audits on identical transactions/issues, often with disparate results. III. New Partnership Audit Rules – Centralized Partnership Audit Regime The Bipartisan Budget Act of 2015 (the BBA) repealed TEFRA and Electing Large Partnership rules and replaced them with a Centralized Partnership Audit regime effective for returns filed for partnerships’ taxable years beginning after December 31, 2017. Under the centralized system, the flow-through nature of the partnership is unchanged, but the partnership is treated as a point of collection of underpayments that would otherwise be the responsibility of partners. The return filed by the partnership, though it is an information return, is treated as ifit were a tax return where necessary to implement examination, assessment, and collection of the tax due and any penalties, additions to tax, and interest. Any tax attributable to these items is assessed and generally is collected at the partnership level as an imputed underpayment paid by the partnership with respect to the adjustment year rather than the reviewed year. * Practice note – the concept of partner-level proceedings to address partner-specific facts/defenses no longer exists. If an eligible partnership elects outs, the present-law rules for deficiency proceedings applies (i.e. TEFRA) . A partnership is eligible if it has 100 or fewer partners during the taxable year and all of the partners are eligible partners, meaning an individual, C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an esta

FAQs

What reporting requirements do partnerships have for federal income tax purposes?

Partnerships must file an annual information return on Form 1065 and provide partners with a relevant statement on Schedule K-1, reflecting partnership income, deductions, gains, losses, and credits.

How do the new centralized partnership audit rules differ from TEFRA?

TEFRA determined partnership items at the partnership level in a unified proceeding but required the IRS to collect taxes from each partner separately at the partner level, often leading to multiple audits. The centralized system treats the partnership as a point of collection for underpayments and generally assesses and collects at the partnership level using an imputed underpayment paid for the adjustment year.

Who has authority to act on behalf of the partnership under the centralized system?

Under the centralized system, the Partnership Representative has sole authority to act on behalf of the partnership, replacing the prior-law role of the Tax Matters Partner.

Sep 19, 2026

Upload by Gloria