IRS Proposes Favorable Regulations on Partnership Audit Rules

January 2018

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On December 15, 2017, the IRS proposed regulations that would allow tiered partnerships, such as master-feeder structures, to make a “push out” election. That election enables the partnership to have the partners from the earlier, audited year pay the tax assessment. This election would also allow the partnership to avoid any potential entity level tax assessments. Before the Proposed Regulations, there was much concern in the asset management industry that the push out election does not work well in the context of tiered partnerships, which are common in fund structures.

Even if the push out election is available there are some other considerations.  One such consideration is that there is an additional 2% interest charge on the tax liability.  In addition, there are limits on the ability to net positive adjustments with negative adjustments, resulting in the risk of a tax assessment on gross income.
In any event, these Proposed Regulations are welcome news for the industry and will hopefully be finalized in the coming weeks.