BBA Partnership Audits and the IRS’ Centralized Partnership Audit Regime: What Business Partners Need to Know in 2022
Among the Internal Revenue Service’s (IRS) many priorities is enforcing partnerships’ federal income tax obligations. In recent years, the IRS has implemented two major programs focused specifically on partnership tax enforcement, and we expect to see increased activity under both of these programs in 2022 and beyond. In this article, Washington D.C. federal tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses some of the implications of these recent developments for business partners:
50 Percent of All Partnership Audits Result in Changes to the Amount of Tax Owed
According to IRS data, 50 percent of all partnership audits for tax years 2016 through 2019 resulted in changes to the amount of tax owed. While this includes both upward and downward adjustments, it is safe to assume that the substantial majority of these changes resulted in an increase in the partnership’s federal income tax liability. This high rate of inaccuracy is the precise reason why the IRS is prioritizing partnership tax enforcement.
The IRS’ BBA Partnership Audit Process and Centralized Partnership Audit Regime
Currently, the IRS uncovers partnership tax fraud through two main programs: (i) the BBA Partnership Audit Process, and (ii) the Centralized Partnership Audit Regime. While these are not the only ways the IRS targets partnerships, they have taken on heightened profiles in recent years.
1. BBA Partnership Audit Process
The IRS’ BBA Partnership Audit Process was created as part of the Bipartisan Budget Act of 2015 (BBA). Under this program, the IRS selects partnership returns to audit based on a preliminary examination, and it notifies selected partnerships through the issuance of Letter 2205-D. Notably, the IRS only sends Letter 2205-D to the partnership’s designated address and not to the individual partners who are ultimately responsible for the partnership’s pass-through income tax liability.
A BBA partnership audit is a lengthy and structured process. While partnerships can “elect out” of the BBA program, doing so has both benefits and drawbacks.
2. Centralized Partnership Audit Regime
The Centralized Partnership Audit Regime is an initiative that is designed to improve the efficacy of the IRS’ partnership audit process as well as enhance enforcement of partnerships’ liability for underpaid tax liability. Under the BBA Partnership Audit Process, partners have the option to “push out” their imputed underpayments provided that they meet certain requirements. Through the Centralized Partnership Audit Regime, the IRS is seeking to both limit the utilization of this “push out” option to appropriate circumstances and ensure eventual collection of the taxes individual partners owe.
Given the IRS’s focus on partnership tax enforcement, business partners need to prioritize tax compliance, and they need to be prepared to deal with the IRS effectively in the event of a BBA partnership audit (or general tax audit). If you need to know more, we invite you to contact us for a confidential consultation.
Schedule a Confidential Consultation with Washington D.C. Federal Tax Attorney Kevin E. Thorn
To discuss your IRS-related concerns with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033, email firstname.lastname@example.org or contact us confidentially online. We will schedule your appointment as soon as possible.