Partnership Tax / TEFRA
IRS audits of partnerships can be complicated since partnerships (and LLCs taxed as partnerships) are not regarded as entities and, therefore, do not pay tax on the income they report. The partners report the partnership’s income, gain, loss, deductions, and credits on their own individual tax returns. Thus, the tax is paid by the individual partners who report partnership income based on information provided by the partnership. When the accuracy of the partnership return is in question, it is often impractical for the IRS to audit the return of each partner and assess a deficiency or refund. Therefore, the IRS audits the partnership itself and any resulting deficiencies and refunds are applied to the partners' tax returns.
Pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), the IRS will first audit the partnership because this is where the losses at issue were generated. Thus, the IRS will audit the partnership to determine whether it properly treated and reported the losses from its disposition of debt and/or other assets. If the IRS determines that the partnership did not properly treat and report the losses, then the Tax matters Partner (“TMP”) must decide whether to appeal this determination.
Once the determination becomes final at the partnership level, the IRS will make corresponding adjustments at the partner level to the partners. Any dispute by the partners will be limited to challenges to the Service’s computations and any partner-level defenses. However, if the IRS does not disallow the losses at issue at the partnership level (or, if, on appeal, it is determined that the partnership properly treated the losses) then the IRS will not be able to make any adjustments to the partnership or its partners.
The tax attorneys at Thorn Law Group are experienced at representing partners and partnerships in audits of partnership activities. We understand the unique principles and procedures that govern partnership audits and litigation.If you are a partner in a partnership that is under audit by the IRS, contact Thorn Law Group Managing Partner Kevin E. Thorn today at 202 349-4033.