On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 (the “Bill”), which repeals the TEFRA Unified Audit Procedures and replaces them with a radically modified “corporate” model for partnership tax audits. The new rules are designed to help fund the Bill by replacing the current three-tiered regime for partnership audits with a uniform system in which audits and assessments occur at the partnership level, subject to some options to elect out of that “default” rule. The current audit regime will remain in place for returns filed for partnership taxable years up until December 31, 2017, after which the new rules will take effect. While the new rules potentially simplify the partnership audit procedures from the perspective of the Internal Revenue Service (“IRS”), they create significant concerns and uncertainty for partners, as many of the most important aspects of the new rules have been left to be determined in future Treasury Regulations.

I. CURRENT LAW (INCLUDING THE TEFRA UNIFIED AUDIT PROCEDURES) -

The current partnership audit rules consist of three different audit regimes depending on the number of partners in a partnership. First, the Internal Revenue Service (“IRS”) audits partnerships with ten or fewer partners under general audit procedures for individuals, auditing the partnership and the individuals separately. Second, partnerships with more than ten partners are audited under the TEFRA rules, which allow for a single administrative proceeding by the IRS at the partnership level. After the partnership level audit is completed, each partner’s tax liability for the taxable year under audit is adjusted according to the results of the partnership level proceeding. Third, under the electing large partnership provisions, partnerships with 100 or more partners can elect to be treated under an audit regime that is similar to the TEFRA rules in that a partnership level audit is conducted. However, rather than the partners making adjustments to their tax returns in the year under audit, any adjustment is made to a partner’s tax return in the year the audit is completed.