Partnership Tax Audits: What To Expect (and What Not to Expect) from the IRS
The Internal Revenue Service (IRS) regularly audits partnerships’ tax returns. For partnerships that have underpaid their federal tax liability, these audits can lead to substantial liability. They can also lead to scrutiny of individual partners’ returns in many cases.
As a result, partners need to take IRS audits seriously. They need to take a structured and strategic approach to defend against the IRS’ audit, and they need to be prepared to take the necessary steps at each stage of the process. This starts with understanding what to expect (and what not to expect) from the IRS during a partnership tax audit.
The IRS’ BBA Partnership Tax Audit Process: An Overview
The IRS conducts most partnership tax audits under the Bipartisan Budget Act (BBA). As the IRS explains, the BBA “replaced the auditing and tax collection procedures for partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and . . . [t]he centralized partnership audit regime, also referred to as BBA or PBBA, is generally effective for tax years beginning January 2018.”
The general process for a partnership tax audit under the IRS’ centralized partnership audit regime, or BBA, is as follows:
1. Notice of Selection for Examination (Letter 2205-D)
The partnership tax audit process begins with the issuance of a Notice of Selection for Examination (Letter 2205-D). Under the BBA, partnerships that receive Letter 2205-D must generally contact the IRS to schedule an initial examination appointment to avoid having the IRS render a decision without their involvement.
2. Notice of Administrative Proceeding (Letters 5893 and 5893-A)
About 30 days after initiating a partnership tax audit, the IRS will issue a Notice of Administrative Proceeding. This is “a statutory notification . . . [that] informs the partnership and partnership representative that the IRS has started an administrative proceeding.” Here, too, partnerships must actively engage with the IRS to ensure that revenue agents do not make a determination of liability before they have the opportunity to present a defense.
3. Summary Report, Request for Appeal and 30-Day Letter Package
After going through these administrative procedures and reviewing the partnership’s returns and supporting documentation, the IRS will issue a summary report. This summary report contains “preliminary audit results and the imputed underpayment computation.” At this stage, the partnership’s next step is to request an Appeals conference; or, if the partnership does not request an Appeals conference, the IRS will then send a 30-Day Letter Package outlining the partnership’s possible next steps.
4. Notice of Proposed Partnership Adjustments
Following the issuance of the 30-Day Letter Package and the completion of any subsequent appellate procedures, the IRS will issue a Notice of Proposed Partnership Adjustments (NOPPA). Among other things, the NOPPA will include Form 886-A, which contains an explanation of the issues identified during the audit and “provides a detailed explanation of the proposed adjustment, the facts, related law, taxpayer position and conclusion.”
5. Request for Modification of Imputed Underpayment
If the partners still disagree with the IRS’ conclusions following the issuance of the NOPPA, the partnership can then submit a request for modification of the IRS’ imputed underpayment. The partnership must submit this request within 270 days in order to preserve its right to challenge the outcome of the audit process.
Discuss Your Partnership’s Tax Audit with Tax Attorney Kevin E. Thorn in Washington D.C.
Partnership tax audits are complex, and they present substantial risks for both the entity and its owners. If the IRS is auditing your partnership, tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, can help, and you can call 202-349-4033, email firstname.lastname@example.org or contact us online to arrange a confidential consultation.