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IRS Re-releases Proposed Partnership Audit Regulations

The Internal Revenue Service (IRS) on June 13 re-released proposed regulations that would overhaul how partnerships are audited. While these proposed rules were originally proposed and then temporarily withdrawn in January after President Trump ordered a pause on all new regulations, they will now govern how partnerships will be audited. 

Currently, the IRS generally holds individuals within a partnership responsible for their share of tax liability. Effective for taxable years beginning after Dec. 31, 2017, the proposed rules would instead mandate that a partnership be audited at the entity, not the individual, level. Therefore, the partnership would be responsible for any additional taxes. Partnerships will be required to designate a representative to represent the entity before the IRS.

Notably, the proposed regulations provide an option that would allow partnerships to remit amended K-1s to the individual partners instead of paying tax at the partnership level. Unfortunately, the regulations do not fully address the issue of enabling a partner that is itself a partnership to push through adjustments to its own individual partners. NAA/NMHC are working to resolve this issue so that there are no cases in which one multifamily partner becomes liable for another partner’s tax obligations. Noting its concerns about allowing such push outs through multiple partnership tiers, the IRS said it is considering approaches on how to address this issue that will be the subject of regulations to be proposed soon. 

NAA/NMHC are also focused on securing a legislative solution that would require partnership push outs of tax liabilities. Congressional tax writers introduced bicameral technical corrections legislation last December that would address the treatment of tiered partnerships by specifically allowing downstream partnership to remit amended K-1s to its own individual partners. Although the technical corrections have not yet been reintroduced in the 115th Congress, they will likely serve as a baseline for action in 2017. 

The proposed regulations are a result of bipartisan budget legislation enacted in late 2015 that was designed to set spending levels and increase the nation’s debt ceiling. Lawmakers sought to reformulate the partnership audit process to address the fact that large real estate partnerships are audited at much lower rates than corporations.

NAA/NMHC have long worked to ensure that the partnership audit process does not disadvantage multifamily industry participants or unintentionally disturb investment. NAA/NMHC requested an extremely beneficial change to original partnership audit proposal introduced in Congress in 2015. That proposal would have made all partners jointly and severally liable for the entire partnership’s tax liability. This would have curbed investment because a partner wouldn’t want to participate in a partnership with essentially unlimited tax liability. This proposal was removed and is a significant benefit to the real estate industry.   

Provided by NMHC as part of the NAA/NMHC Joint Legislative Program