The Bipartisan Budget Act of 2015 that was signed into law on November 2, 2015, made extensive changes to the rules that apply to partnership audits and the mechanics for collecting taxes resulting from an audit. These changes are likely to have a substantial impact on private equity funds, hedge funds, and other private investment funds, since most are conducted through “tax partnerships.” As the new rules make it easier for the IRS to perform partnership audits, such audits are likely to increase. Moreover, the default collection mechanism under the new rules is a direct tax on the audited partnership. Both fund sponsors and investors will need to carefully evaluate the audit provisions of fund agreements and consider whether existing fund agreements should be amended.

Tax-exempt investors are particularly at risk for sharing new partnership-level federal income taxes, penalties, and interest, absent an amendment to the applicable fund agreement.