New IRS Audit Rules for Partnership
As part of the Bipartisan Budget Act of 2015, which was signed into law on November 2, 2015, the IRS will be able to audit partnerships at the entity level just as it did under "TEFRA" audit rules but will be able to impose tax, interest, and penalties on the partnership at the entity level rather than having the burden of collecting the tax from the individual partners. The new law will provide an opt out provision for small partnerships (100 or fewer partners) so the IRS will be forced to assess the tax against individual partners. However, there is an exclusion for partnerships that have partners which are also partnerships (e.g., LLCs treated for tax purposes as partnerships). The new rules will take effect for tax years beginning on or after January 1, 2018.
Businesses structured as partnerships or limited liability companies should pay close attention to the recent changes in the IRS audit procedures and determine whether amendments to their operating agreements need to be made in view of the new rules.
Ninth Circuit Bankruptcy Appellate Panel Applies Subjective Standard in Determining When a Tax Return is Not a Tax Return for Purposes of Bankruptcy Discharge
On December 17, 2015, the Ninth Circuit Bankruptcy Appellate Panel (BAP) in United States v. Martin (In re Martin), 2015 WL 9252590 (9th Cir. BAP 2015) defined what qualifies as a tax return for dischargeability purposes. The BAP rejected the literal interpretation of section 523(a)(*) and concluded that the relevant inquiry is whether the document represented an honest and reasonable attempt to satisfy the requirements of the tax law. Rather than examining only the Forms 1040 provided to the IRS, an objective test, the BAP ruled that the Court should have considered the debtors' reasons for filing the Form 1040 late, a subjective test. On remand, it directed the Bankruptcy Court to consider other factors, such as the length of the delay, the reason for the delay, and the number of tax years missed.
Serious Delinquent Taxes May Result in Revoked U.S. Passports
On December 4, 2015, President Obama signed into law Fixing America's Surface Transportation Act ("FAST Act"). Section 32101 of the FAST Act adds section 7345 to the Internal Revenue Code ("Code"), which allows the IRS to coordinate with the State Department to revoke or deny a passport to a U.S. person with a "seriously delinquent tax debt" (i.e., tax debt that is greater than $50,000 including interest and penalties). The Joint Committee on Taxation reported that this provision of the FAST Act is expected to raise $395 million over 10 years.