Tax Watch: IRS issues new rules on partnership audits

The Internal Revenue Service has issued final regulations on unified audit procedures for partnerships and partners. The revisions were first required by the Tax Equity and Fiscal Responsibility Act of 1982.

Congress amended the standards in the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998 to simplify them and increase their fairness.

In essence, IRS audits of partnerships now carry over to the individual partners and vice versa.

The new regulations also carry out the IRS’ stated intention to finalize all the outstanding partnership-audit regulations. The rules take on added significance, since the IRS will reportedly be putting more emphasis on partnership audits.

The IRS has changed its guidance on notices of partnership proceedings to state that it does not have to issue a final partnership administrative adjustment when it issues, and does not withdraw, a notice that an administrative proceeding has begun.

In addressing who is treated as a partner, the regulations clarify that the exception for partnerships with 10 or fewer partners does not apply if any partner is a non-resident alien.

The IRS has indicated that under the final regulations, for couples filing jointly the non-partner spouse will not be treated as a partner and, therefore, will not be bound by the outcome of the partnership audit if the partner-spouse’s partnership items are converted to non-partnership items.

The IRS has also expanded the definition of an affected item to include the application of the passive-loss rules to a partner for a loss flowing from a partnership, to the extent that it is not a partnership item.

The IRS has stated that the final regulations apply to unified partnership-audit proceedings for taxable years that begin on or after Oct. 4. The temporary regulations continue to apply to proceedings involving a taxable year beginning before that date.

Cite: T.D. 8965, 66 Fed. Reg. 50541

IRS updates its per diems

The IRS has updated the per diem rates, the list of high-cost localities and the rules for deducting business meal expenses under the simplified record-keeping procedures. Per diems based on where the taxpayer traveled are permitted in lieu of receipts.

According to the IRS, for expenses of all eligible travel that are paid or incurred during calendar 2001, taxpayers may continue to use – in lieu of the updated rates – the rates in effect the first nine months of the year.

The taxpayer must consistently use either those rates or the updated rates for expenses incurred on or after Oct. 1.

Cite: Rev. Proc. 2001-47

Bond issuers get more time

The IRS has announced that it will provide issuers of tax-exempt bonds affected by the Sept. 11 terrorist attacks with additional time to file certain information returns and arbitrage rebate returns.

“The extension will provide affected issuers of tax-exempt bonds with the additional time they need to resolve outstanding issues resulting from the tragic events,” IRS Commissioner Charles O. Rossotti said recently. “We want to provide whatever assistance issuers of tax-exempt bonds need to be able to comply with the requirements of the law.”

Affected issuers whose original filing or payment deadline was between Sept. 11 and Nov. 30 will have an additional six months plus 120 days to file the return and make any payment due with the return.

Issuers of tax-exempt bonds entitled to the extension should add the following designation in red ink at the top of their return: “Sept. 11, 2001 – Terrorist Attack.”

In addition to providing additional time for filing and payment, the IRS will also grant relief to affected issuers under other circumstances. The details of this extension will be outlined in the Oct. 22 Internal Revenue Bulletin.

Cite: IRS Announcement 2001-101.