Bipartisan Budget Act of 2015 Repeals TEFRA Partnership Audit Rules in Effect Since 1982
Partnerships – including partnerships with 100 or more partners – are among the fastest growing types of business entities in the United States today. A provision of the Bipartisan Budget Act of 2015 ("BBA"), which had the salutary effect of averting a federal government shutdown, eliminates the unified partnership audit rules first introduced in the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). Before TEFRA, partnership returns generally were audited as adjuncts to audits of the personal returns of the individual partners. The effect of a change to a partner’s return could thus result in separate administrative and potentially inconsistent treatment at the partnership level. TEFRA established procedures under which the partnership itself would be audited and adjustments made at the partnership level that would then flow through to the returns of the individual partners. This worked well for partnerships with relatively few members, but with many partnerships now numbering hundreds or even thousands of partners, the audit process has become unwieldy and inefficient.
Effective for tax years beginning January 1, 2018, the BBA replaces the TEFRA partnership rules with a new partnership audit regime applicable to all partnerships. Under the new rules, adjustments to items of partnership income, gain, loss, deduction or credit – and a partner’s distributive share thereof – are determined at the partnership level. No distinction is made among partnership items. Non-partnership items and items affected by partnership items, all of which were accorded separate treatment under TEFRA.