Thursday, December 8 2022

IRS reviews of partnerships under the Bipartisan Budget Act of 2015 (BBA) procedures, PL 114-74, have more often ended without any additional tax liability offered than all partnership audits of returns for the same tax years, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit (Rep’t No. 2022-30-020).

Partnerships filing Form 1065, Return of partnership income to the United States, for tax years beginning on and after January 1, 2018, must use the centralized partnership audit regime, also known as BBA audits. Partnerships were also allowed to “opt in early” to BBA procedures for reviewing returns for tax years beginning after November 2, 2015 and before January 1, 2018. By instituting centralized audit procedures for partnerships, the BBA repealed the previous provisions, which had been specified by the Tax Fairness and Accountability Act (TEFRA) of 1982, PL 97-248, and are known as TEFRA audits.

Generally, the two regimes differ in the extent to which they encompass the returns of the partners of a partnership. Although TEFRA required that the tax treatment of partnership items be determined at the partnership level and that tax underpayments be determined from adjustments made to the partnership’s return, a review of these items and adjustments required resolving issues with partners. The partners were generally responsible for any underpayment. Under the AMLA, the partnership must, by default, pay any underpayment resulting from adjustments made to the partnership’s return. However, the partnership can elect to pay the underpayment by “delaying” related review adjustments to individual partners to report on their tax returns.

Although the IRS’ decisions regarding audit returns do not depend on the applicable partnership regime, TIGTA has undertaken its statutorily mandated task under the BBA to determine whether the IRS has properly implemented its provisions.

As of the end of fiscal year 2021 (i.e. September 30, 2021), the IRS had completed 480 BBA partnership audits, including returns filed for tax years 2026 through 2019. Of those it closed 376, or 78% unchanged. For the Service’s audits of all partnership filings for the same tax years it closed on September 30, 2020, the non-change rate was 50%, TIGTA reported.

“IRS management has agreed that the rate of no change [for BBA audits] is high,” TIGTA reported. However, he said, the IRS “believes it is too early in the process to analyze and draw conclusions about the rate of no change.” TIGTA, the IRS had not determined what would be an acceptable rate.

TIGTA also challenged the IRS’ practice of not basing its audit objectives on the set of procedures it used, noting that BBA procedures are intended to reduce the administrative and judicial burden on the Service compared to that TIGTA procedures. TIGTA recommended that the IRS set targets and measure whether BBA audits require fewer overall resources to complete and administer than TEFRA audits, taking into account the rate of non-change.

“By not having these goals, the IRS cannot measure the effectiveness of the new audit rules on taxpayer compliance,” TIGTA said.

Additionally, the non-change rate of BBA audits “suggests[s] that compliant taxpayers can be overwhelmed and non-compliant taxpayers go unidentified,” TIGTA said. The rate of 78% with no change was based on the total declarations for the four fiscal years represented; returns for the 2019 tax year, it was 90%.

BBA audits, however, represented a relatively small percentage of all partnership audits closed in fiscal years 2019 to 2021, TIGTA noted, the total, according to IRS data books for those years, totaling 21,392, TIGTA said in a statement. Footnote.

IRS management also suggested to TIGTA that the higher no-change rates for BBA audits might actually reflect their greater efficiency: they can be closed more quickly. The IRS also pointed out that reviews that result in additional tax being imposed take longer — often more than a year — and therefore may not have been entered by the sample deadline.

However, TIGTA said it also compared the number of hours reviewers spent on no-change audits (of both types), which it said took 66 hours longer per return, while reviews to which partnerships or partners agreed took, on average, 53 hours per return.

TIGTA recommended that the IRS investigate any factors that may contribute to a higher BBA non-change rate, such as how cases are selected, and establish a baseline rate and corrective actions.

The IRS disagreed with this recommendation, saying it was trying to minimize the no-change rate and that a benchmark could violate IRS Section 1204 Restructuring rules. and Reform Act of 1998, PL 105-206, which prohibits the IRS from using tax enforcement earnings records to assess or impose production quotas or targets on employees.

TIGTA, in turn, said it was not proposing this and cited internal revenue manual provisions and regulations in support of its recommendation. Second. 801.6(d)(2), which permits the disclosure of tax law enforcement results for the purposes of forecasting, financial planning, resource management, and formulating case selection criteria.

The IRS also disagreed with TIGTA’s recommendation to establish broad partnership review objectives and metrics regarding the expected results of implementing the BBA audit regime. The Service said it would, however, establish qualitative goals and measures for reviewers following BBA procedures.

— To comment on this article or suggest an idea for another article, contact Paul Bonner at [email protected].

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