In November 2015 Congress enacted new audit rules for partnership tax returns. The rules depart significantly from the current rules in effect since enactment of the Tax Equity and Fiscal Responsibility Tax Act of 1982 ("TEFRA"), by, among other things, providing for increased centralization of audits at the partnership level and creating a new mechanism for partnership-level payment of additional tax owed.
The new audit rules will generally be effective only for partnership taxable years beginning after December 31, 2017. There is significant uncertainty as to how the audit rules will work, and the time before the effective date should give Congress and Treasury time to provide additional guidance in the form of technical corrections and regulations. However, attorneys drafting partnership agreements need to know about the rules now, to ensure that such agreements have provisions that properly account for future audits. In particular, the new rules provide for multiple elections, and drafters should consider who has the authority to make the elections and which choices should be made.