What Partners in International Partnerships Need to Know About the IRS Audit Process
Partnerships with foreign partners are subject to several federal tax requirements that do not apply to other types of businesses. For example, as the Internal Revenue Service (IRS) explains, in addition to filing an annual partnership tax return, “[p]artnerships . . . with foreign partners . . . could be responsible for [a] FIRPTA withholding, NRA withholding, and partnership withholding under sections 1446(a) and 1446(f) of the Internal Revenue Code (IRC).”
Due to these additional requirements (among others), partners in international partnerships need to carefully address their entities’ federal tax obligations. They also need to be prepared for the possibility of an IRS audit. The IRS is prioritizing partnership tax audits under its new BBA Centralized Partnership Audit Regime, and it is placing particular emphasis on enforcing international partnerships’ reporting and filing obligations.
The IRS Audit Process for International Partnerships: An Overview
Under the IRS’ BBA Centralized Partnership Audit Regime, the audit process has several steps. Partners in international partnerships must ensure that they are prepared for each step in the process, and this starts with conducting an internal tax compliance assessment promptly upon learning of an impending audit. The major steps in the IRS' partnership tax audit process are:
1. Notice of Selection for Examination
The partnership tax audit process begins with the IRS issuing a Notice of Selection for Examination (Letter 2205-D). Upon receiving a Notice of Selection for Examination, the partnership’s representative must contact the IRS to schedule an initial examination appointment.
2. Notice of Administrative Proceeding
About 30 days after sending the Notice of Selection for Examination, the IRS will send a Notice of Administrative Proceeding (Letters 5893 and 5893-A). This signifies that the IRS has opened a formal administrative review, and it closes the window for an international partnership to file an Administrative Adjustment Request (AAR). It also prohibits the partners from filing returns that are inconsistent with the partnership’s returns for the tax year(s) under review.
3. Summary Report and Next Steps
After conducting an initial review of the international partnership’s returns and supporting documentation, the IRS will issue a summary report. The summary report outlines the IRS’ preliminary audit results and states the partnership’s imputed underpayment calculation. Once the IRS issues a summary report:
- The IRS will send a 30-Day Letter Package explaining the appeals process
- The partnership can request an appeals conference “if certain conditions are met”
- The partnership can submit a protest in support of its appeal, and the examiner can issue a rebuttal in response
- The IRS will issue a Notice of Proposed Partnership Adjustments (NOPPA) package explaining the reasoning for its decisions following the partnership’s appeal
- The partnership can submit a request for modification of the IRS’ imputed underpayment; and if the IRS denies the request, the partnership can pursue a post-modification appeal
Contact International Partnership Tax Lawyer Kevin E. Thorn in Washington D.C.
International partnership tax audits present substantial risks, and partners need to ensure that they are thoroughly prepared for the lengthy and complex audit process. To discuss your partnership’s audit with Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033 or contact us confidentially online today.