Audit rules live on despite White House “freeze” on partnership audit regulations

Blog Post

Taxpayers and practitioners alike were relieved to see regulations issued last month on the new partnership audit rules that were enacted as part of the Bipartisan Budget Act of 2015 (the “Partnership Audit Rules”). These new rules fundamentally change the way partnership audits and assessments are handled, are extremely complicated, and (as the IRS itself acknowledged) required additional guidance on many of the provisions. The approximately 280 pages of regulations issued last month, therefore, promised to answer many of the questions raised by the new rules.

The relief was somewhat short-lived, however, as the White House issued a “regulatory freeze” on all regulations that had been sent to the Office of the Federal Register, but had not yet been published. Although the regulations on the audit rules apparently had not even been sent to the Office of the Federal Register, the freeze included these regulations. While this type of freeze is not an unusual action for a new president, the timing was unfortunate for partnership and LLC owners and their advisors.

It seems unlikely that these regulations, or for that matter the Partnership Audit Rules themselves, are going anywhere permanently. The Partnership Audit Rules were passed legislatively in 2015; these provisions are law (subject only to their 2018 effective date) and are in the Internal Revue Code. As the name of the Act implementing the rules indicates, this was a bipartisan legislative act and had broad support in Congress. These regulations simply provide much-needed guidance on the rules that will almost certainly go into effect at the end of this year.

Practitioners and taxpayers who need to gear up for the 2018 implementation of the Partnership Audit Rules will, therefore, still be looking at these regulations for guidance despite the freeze.

Next week, we will look at the guidance issued under these regulations relating to the ability of a partnership or LLC to completely opt-out of the Partnership Audit Rules. One area of concern has been that since a trust is not an eligible shareholder for a partnership wanting to opt-out of the new rules, even ownership by a grantor trust, a structure that is very common for estate planning purposes, would preclude the opt-out election. Unfortunately, the new regulations did not provide relief in this area, precluding many partnerships and LLCs from opting out unless the equity is moved out of the trust back to the qualified owner.