Legislation impacts tiered partnerships and M&A transactions. Existing partnerships should review operating agreements before new rules take effect.

The Bipartisan Budget Act of 2015 (the Act), which President Obama signed on November 2, upends the way the Internal Revenue Service (IRS) conducts partnership audits, with potentially far-reaching effects. The new audit procedures apply at the partnership level and the partnership must pay the tax deficiencies resulting from any audit adjustments, unless the partnership affirmatively elects to pass the adjustments on to its partners. The new rules apply to all partnerships (including limited liability companies taxed as partnerships) with more than 100 partners, and to partnerships with 100 or fewer partners if any of the partners is itself a partnership or a trust. Other partnerships may elect out of the regime, in which case audits and adjustments relating to partnership items would take place at the partner level.