James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comKey Contacts
Back
The new Bipartisan Budget Act of 2015 could have massive tax implications for partnerships
Congress recently revamped the rules by which the IRS examines partnerships for tax purposes with the repeal of the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA rules, otherwise known as unified audit and litigation procedures. The TEFRA rules were replaced under the Bipartisan Budget Act of 2015. The new rules to simplify the IRS’s examination of partnerships, assessment and the collection of taxes from them. The essence of this change is that it will permit the IRS to collect more tax without increasing staff. These new tax rules will be applied to certain partnerships on Jan. 1, 2018.
The new Bipartisan Budget Act of 2015 rules
With the repeal of TEFRA rules, the IRS now requires entities to designate a powerful partnership representative rather than a tax matters partner. The rules also removed partners of notice and participation rights for partnership-level examination and litigation. In addition, IRS will switch to default collection procedures from the partnership for any additional taxes or penalties that exist at the partnership level. What this means for partners is that they should review the provisions of their partnership agreements and adjust their tax representation and procedures accordingly.
A notable example of these changes under the new rules involves smaller partnerships. Specifically, any partnership with fewer than 100 partners can opt out of the tax examination and collection regime under the Bipartisan Budget Act. But to qualify for this opt-out clause, those partnerships need to consist either solely of individuals, C corporation, foreign entities that are treated as C-corps, S corporations or estates of deceased partners.
It is important to note though, while grantor trusts and limited liability companies with only one member are currently treated as individuals for tax purposes, the new rules deem them as a partnership. That means they are ineligible for the opt-out provision. This is an indirect attack on planning techniques that are not favored by this administration.
These strict stipulations under the new rules are meant to simplify IRS tax treatment of partnerships by clearly defining them. But for those unaware of the new rules or the statutory opt-out provisions, the IRS is seeking comment for possible further regulations to resolve issues of interpretation.
Why the IRS seeks comment
The intentions of the Bipartisan Budget Act of 2015 rules have been well known for some time, but the bill was quickly drafted. Congress also followed this bill with the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015 to address technical issues and ambiguities. So there were concerns over whether the IRS would fill in gaps in the legislation.
This is why the IRS then issued Notice 2016-23 to seek comments about the new tax collection regime under the bill. As the potential tax ramifications are significant for partnerships and limited liability companies, the IRS seeks comment on several specific stipulations. The most notable listed on the IRS website include:
- Partnership representatives.
- Tax calculations at the partnership level.
- Revised K-1 and push-out procedures.
- Administrative adjustment requests at the partnership level.
- General procedural rules.
The significance of the bill for existing partnerships
The Bipartisan Budget Act’s new tax audit and collection regime has understandably caused some concern among partnerships and limited liability companies. This is primarily due to the favorable state and federal income tax rules that existed for both partnership and limited liability companies. But as there are several new legal ramifications involved in the regime that could affect post-adjustment tax items, existing partnerships should examine their partnership agreements to accommodate the new rules. In fact, one way these entities can proactively adjust is to modify their partnership agreements to align with the new rules prior to the deadline. This would retroactively adjust to the tax ramifications before the enactment date, thereby avoiding any penalties or additional taxes.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Author: Jesse M. Dimitro
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Author: Jesse M. Dimitro
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Author: Scarinci Hollenbeck, LLC
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
Author: Dan Brecher
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
Author: Ronald S. Bienstock
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
Author: Patrick T. Conlon
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
The New Bipartisan Budget Act of 2015
Author: James F. McDonough
The new Bipartisan Budget Act of 2015 could have massive tax implications for partnerships
Congress recently revamped the rules by which the IRS examines partnerships for tax purposes with the repeal of the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA rules, otherwise known as unified audit and litigation procedures. The TEFRA rules were replaced under the Bipartisan Budget Act of 2015. The new rules to simplify the IRS’s examination of partnerships, assessment and the collection of taxes from them. The essence of this change is that it will permit the IRS to collect more tax without increasing staff. These new tax rules will be applied to certain partnerships on Jan. 1, 2018.
The new Bipartisan Budget Act of 2015 rules
With the repeal of TEFRA rules, the IRS now requires entities to designate a powerful partnership representative rather than a tax matters partner. The rules also removed partners of notice and participation rights for partnership-level examination and litigation. In addition, IRS will switch to default collection procedures from the partnership for any additional taxes or penalties that exist at the partnership level. What this means for partners is that they should review the provisions of their partnership agreements and adjust their tax representation and procedures accordingly.
A notable example of these changes under the new rules involves smaller partnerships. Specifically, any partnership with fewer than 100 partners can opt out of the tax examination and collection regime under the Bipartisan Budget Act. But to qualify for this opt-out clause, those partnerships need to consist either solely of individuals, C corporation, foreign entities that are treated as C-corps, S corporations or estates of deceased partners.
It is important to note though, while grantor trusts and limited liability companies with only one member are currently treated as individuals for tax purposes, the new rules deem them as a partnership. That means they are ineligible for the opt-out provision. This is an indirect attack on planning techniques that are not favored by this administration.
These strict stipulations under the new rules are meant to simplify IRS tax treatment of partnerships by clearly defining them. But for those unaware of the new rules or the statutory opt-out provisions, the IRS is seeking comment for possible further regulations to resolve issues of interpretation.
Why the IRS seeks comment
The intentions of the Bipartisan Budget Act of 2015 rules have been well known for some time, but the bill was quickly drafted. Congress also followed this bill with the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015 to address technical issues and ambiguities. So there were concerns over whether the IRS would fill in gaps in the legislation.
This is why the IRS then issued Notice 2016-23 to seek comments about the new tax collection regime under the bill. As the potential tax ramifications are significant for partnerships and limited liability companies, the IRS seeks comment on several specific stipulations. The most notable listed on the IRS website include:
- Partnership representatives.
- Tax calculations at the partnership level.
- Revised K-1 and push-out procedures.
- Administrative adjustment requests at the partnership level.
- General procedural rules.
The significance of the bill for existing partnerships
The Bipartisan Budget Act’s new tax audit and collection regime has understandably caused some concern among partnerships and limited liability companies. This is primarily due to the favorable state and federal income tax rules that existed for both partnership and limited liability companies. But as there are several new legal ramifications involved in the regime that could affect post-adjustment tax items, existing partnerships should examine their partnership agreements to accommodate the new rules. In fact, one way these entities can proactively adjust is to modify their partnership agreements to align with the new rules prior to the deadline. This would retroactively adjust to the tax ramifications before the enactment date, thereby avoiding any penalties or additional taxes.