Update: IRS Audits More Partnerships

Published by Michael Novogradac on Thursday, February 25, 2016 - 12:00am

As predicted in this space three and a half years ago, the Internal Revenue Service (IRS) audited more partnerships over the past few years. While the overall audit rate of partnerships is low (generally between a third and a half a percent), both the audit rate and the number of audits is up recently. In 2015, there were 22 percent more audits of partnerships than there were in 2014, and 29 percent more than in 2013. In terms of audit rates, partnerships saw an 18 percent higher audit rate in 2015 than in 2014 and 22 percent higher than 2013. While it’s unclear if partnership audit rates will continue to rise in 2016, recent statutory changes to partnership audit rules will surely increase the number of partnership audits after 2017.

The Bipartisan Budget Act of 2015 contained new rules designed to simplify and streamline how the IRS conducts audits of partnerships. Specifically, the legislation contained provisions that direct the IRS to collect adjustments from the partnership rather than from individual partners. The new law also replaced the three existing partnership audit regimes—which depend on the size and composition of the partnership—with one audit regime for all partnerships There are provisions that allow partnerships with 100 or fewer partners to opt out. Under the new law, as enacted, a partnership that has another partnership as a partner is not generally eligible to elect out. The goal of making auditing easier for the IRS is to enable more taxes to be collected.

The new legislation will certainly lead to a further increase in the number of IRS partnership audits after 2017. And given the preponderance of tiered partnership arrangements in the tax credit arena, it’s certain that the affordable housing, community development, historic preservation and renewable energy communities will feel the effects of this increase.

Learn More

To learn about the implications of the new partnership audit provisions for tax credit partnerships, register for the Novogradac New Rules for IRS Audits of Partnerships Webinar that will be presented March 2.