Partnerships in the United States are treated as conduits for tax reporting purposes, with the partnership filing a tax return each year and issuing information returns to its partners. While this system generally works well, problems may arise if a partner wishes to treat an item differently than how it was reported by the partnership. Special filing procedures under a centralized partnership audit regime must be followed, and partners should also consult their partnership agreements to see if inconsistent reporting is allowed.
Historically, the IRS had difficulties auditing partnership tax returns, leading to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) to streamline the process. However, TEFRA had its flaws, leading to its replacement by the Bipartisan Budget Act of 2015 (BBA). The BBA allows the IRS to conduct centralized examinations of partnerships and make assessments directly against the partnership unless action is taken to have the tax paid by the partners.
Under the BBA rules, partners must generally report consistently with how the partnership reported the item on its tax return. Failure to do so may result in the IRS making adjustments to the partner’s return to align it with the partnership’s reporting. Partners can alert the IRS of their intention to take an inconsistent position by filing IRS Form 8082, which prevents the agency from using summary assessment procedures to correct the error.
Partnerships can elect out of the BBA rules, unless they have ineligible partners, and partners must carefully consider their options if they wish to claim an inconsistent reporting position. Partners should ensure that they file Form 8082 with their return to notify the IRS of their intentions and review their partnership agreements to confirm if inconsistent reporting is allowed. Failure to comply with the terms of a partnership agreement could result in a breach of contract lawsuit for the partner.
In conclusion, partners in BBA partnerships have the flexibility to treat partnership items differently than how they were reported by the partnership. However, partners must follow the BBA rules and consult their partnership agreements before taking any action. By ensuring compliance with these rules and agreements, partners can navigate the complexities of tax reporting within partnerships effectively.
