Accounting
IRS targets large partnerships for increased audits
The Internal Revenue Service is ramping up its scrutiny of large partnerships, leveraging increased funding under the Inflation Reduction Act of 2022.
Last year, the IRS
“There is a special initiative with the large partnership compliance program, and for that the IRS announced they have selected 76 entities, and they’re doing large partnership audits,” said Rochelle Hodes, principal in the Washington national tax office at Crowe LLP, a Top 25 Firm based in Chicago. “But that’s a special category. What we’ve seen in partnership audits is generally an increase.”
She recently shared her insights with Accounting Today on the main takeaways for taxpayers involved in partnerships to ensure compliance and successfully navigate partnership audits amid increased scrutiny. She also recently discussed this topic in an Insight article for Crowe that can be
Andrew Harrer/Bloomberg
“I expect that we’ll start to see the results of the IRS having better trained agents and better behind-the-scenes issue selection,” she added. “I expect we’re going to start seeing that in the examinations as well.”
The IRS has been training more people to do these types of complex examinations and audits thanks to the Inflation Reduction Act funding. “They were working with a very skinny staff before the IRA money allowed them to hire, so they were basically operating, in some respects, with one hand behind their back,” said Hodes. “Because partnerships are sophisticated and because they have the various operating divisions in LB&I, they were taking their auditors who were more experienced, who basically were corporate. They knew issues that corporations had, and so you’re taking these people who had been doing exams in a certain way and focusing on certain issues, and they moved them over, and they didn’t provide very much training.”
The IRS had also been auditing partnerships in its Small Business/Self-Employed Division. “Then you have the small business auditors who were focusing on a lot of their bread and butter issues, which if the partnership you selected was an operating partnership that operated a business that made sense,” said Hodes. “Issues like employment, tax and certain accounting method things, those would be normal for them, but I think that they just completely missed the mark because they were not trained either on partnership issues. Now we have a change.”
A new Pass-through Entities Practice Area group in LBI led by Cliff Scherwinski is combining the SB/SE and the LBI resources for audition and training those personnel.
“I think the result is going to be potentially a better trained examination workforce for partnerships, more agents focused on partnerships, and more consistency in what the taxpayer experiences when they have an examiner doing the partnership exam, and I think that’s a good thing,” said Hodes.
The new approach overlaps with the implementation of a centralized partnership audit regime at the IRS. The Bipartisan Budget Act of 2015 allowed the IRS to set up a
“The other thing that we saw in the beginning of this whole thing with BBA coming in, the BBA procedures for conducting an examination are different in a number of ways, and my experience was most of the agents had no idea what the BBA procedures were, and I think they were given very few tools to help them with that,” said Hodes. “There also was not a lot of process, so there wasn’t a lot of consistency. I think we’ve started to see much more consistency. We’ve started to see teams training. Being an auditor, being an examiner, is a skill set in itself, notwithstanding the subject matter that you do it in or the division that you’re in. We’re seeing some of this knowledge transfer. We’re seeing some consistency, and I think the IRS will proceed further with that. Truthfully, that’s a good thing for the taxpayer as well. At least if you’ve got to be audited, you want to be audited by people who know what they’re talking about, who know what the procedures are supposed to be, because for a lot of taxpayers, this will be their first exam for many partnerships, and it will be their first exams under the BBA procedures. So it’d be very nice if they could rely on the IRS knowing what they’re doing. And I think we’re going to see a smoother process. While it’s not wonderful to be audited, at least if the process is smoother, and you have knowledgeable folks who are performing the exam, it can take that little bit of pain out of the examination.”
She is seeing more consistency under the BBA regime.
“One of the things that is different is the idea of an examination is consistent throughout,” said Hodes. “You get selected, the IRS goes and asks you questions with information document requests, IDRs. And then the agent might go to specialists or not, but will identify issues that they’re concerned about. You talk about those issues, then the IRS agent will let you know what they think their issues are going to be. The way things worked in a corporate exam in LB&I, it was a notice of proposed adjustment. But before that, there was an informal process where the agent would give a draft and sort of write up their issues to the taxpayer, in order to get the taxpayer’s response and work through to see if there really are any issues, to get an idea of this potential agreement and to try to really fine-tune before they got to the notice of proposed adjustment, BBA has statutorily got this notice of proposed partnership adjustment, so that’s a similar process. But then LB&I put it into their processes. They formalized that preliminary or draft as a step in the BBA process, and that step starts the clock to request an appeal on the substantive issues, formalizing that sort of draft or preliminary NOPPA, but the names are different on these things, and the notice of proposed partnership adjustment also comes with a draft, as does the preliminary draft of the imputed underpayment computation as well. There are the substantive issues. And then how, under the uniqueness of BBA, they compute whatever tax is supposed to be due, which is the imputed underpayment. So those are other differences. And then, once the notice of proposed partnership adjustment is issued, that then starts a 270-day clock for the taxpayer to request modification.”
She noted that if a taxpayer requests a modification and it’s denied, the taxpayer will have another opportunity to go to the IRS Appeals office about the denial of the modification. “It’s not a second fight for issues that you already went into Appeals for, but it’s that two opportunities to go to Appeals that are unique,” said Hodes.
There are some similarities as well as differences. “After the modification process is over, then you get whatever now your adjustments and imputed underpayment is post modification,” said Hodes. “You’ve got this final partnership adjustment, which looks a little bit in the TEFRA [Tax Equity and Fiscal Responsibility Act of 1982] space like the final FPA. You’ve got the final notice, and that has an equivalent in the corporate space or the individual space with the notice of deficiency. And so those are your ticket to go to court. Within 90 days, you have to ask to go to court. That’s a similarity. There’s this final determination by the IRS, and once they give it to you, you get 90 days to say if you go to court. Another difference in BBA is you’ve got 45 days to make an election of whether or not you want to push out the adjustments, if you want to make that pushout election, and that 45 days is a strict date, and it runs concurrent with that 90 days. So in the first 45 days after you get an FPA, you’ve got to decide, am I going to push out, or is it possible I might want to push out. Then, if it is possible, you’ve got to make the election. And then within that 90-day period, which 45 days is running as well. So you’ve got these two time frames running at the same time. You then decide whether or not you want to go to court.”
She sees that as another major difference. “After you get your final partnership adjustment, you’ve got two decisions: Do I push out? Do I go to court? There’s a bunch of other stuff, but those are the big changes in process.”
However, the November election is likely to have an impact on partnership audits. “Depending who wins in Congress and the White House and whether and how the negotiations on TCJA expiring provisions go, we could see some form of partnership legislation,” said Hodes.
She pointed to several possible wrinkles. “Carried interest has been a hot issue for a long time,” said Hodes. “Senator [Ron] Wyden had a whole partnership reform bill at one point that could come back to life, and you have the administration’s Green Book that has a bunch of partnership updates, so there’s a lot of potential for continued change. And then you have the IRS SECA [Self-Employment Contributions Act] issue with LPs. That’s a super hot issue right now. A lot going on. You’ve got the basis-shifting proposed regs that they put out. That’s sort of bubbling up over there. You have IRS talking about being concerned with disguised sales and wanting to do new guidance on that. On the guidance front too, there’s potential for more change in the partnership space. And then the TCJA expiring provisions are mostly individual provisions, but 199(A) is supposed to expire at the end of 2025. Huge in the pass-through space. [Section] 461(l), which limits business losses that can be claimed by noncorporate taxpayers is a huge passthrough issue. 461(l) is supposed to expire, I think, at the end of ’28. Will that be extended as part of raising revenue in order to get to a deal in TCJA? Who knows? There are all kinds of passthrough-specific things that are also swirling around. If I’m in a partnership or passthrough or I am someone who is heavily involved in passthrough entities or has significant investments in passthrough entities, I’m watching all of this stuff, and there’s so much change.”
Her firm, Crowe, has a campaign called “Embrace Volatility.” “Certainly for passthrough entities, that is the way they should think about stuff,” said Hodes.
She also sees implications in the international space. “A lot of the international rules are going to be dealing with pass-through non-U.S. entities,” said Hodes. “How are global MNCs or MNEs [multinational companies or enterprises] going to be dealing with components of their structure that are pass-through entities? The rules are, in some cases, very uncertain, and in other cases very unfavorable. There’s a lot affecting pass-through entities in the international space. One of the biggest tax issues right now is the taxation of passthrough entities. I think that’s just huge right now, because everything’s so up in the air, and the IRS is really starting to focus.”
Final regulations now identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions.
The final regs apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions.
During the proposal process, the Treasury and the Internal Revenue Service received comments that the
- Increased dollar threshold for basis increase in a TOI. The threshold amount for a basis increase in a TOI has been increased from $5 million to $25 million for tax years before 2025 and $10 million for tax years after.
- Limited retroactive reporting for open tax years. Reporting has been limited for open tax years to those that fall within a six-year lookback window. The six-year lookback is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations (
slated for Jan. 14 in the Federal Register). Also, the threshold amount for a basis increase in a TOI during the six-year lookback is $25 million. - Additional time for reporting. Taxpayers have an additional 90 days from the final regulation’s publication to file disclosure statements for TOIs in open tax years for which a return has already been filed and that fall within the six-year lookback. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations.
- Publicly traded partnerships. Because PTPs are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules.
The identified transactions generally result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership, or the tax-free transfer of a partnership interest by a related partner to a related transferee.
Bloomberg via Getty Images
The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), but for which no corresponding tax is paid.
The basis increase to the distributed or partnership property allows the related parties to decrease taxable income through increased cost recovery allowances or decrease taxable gain (or increase taxable loss) on the disposition of the property.
The Treasury Department and the Internal Revenue Service proposed new rules for the tax credit for qualified commercial clean vehicles, along with guidance on claiming tax credits for clean fuel under the Inflation Reduction Act.
The
The credit is the lesser amount of either 30% of the vehicle’s basis (15% for plug-in hybrid EVs) or the vehicle’s incremental cost in excess of a vehicle comparable in size or use powered solely by gasoline or diesel. A credit up to $7,500 can be claimed for a single qualified commercial clean vehicle for cars and light-duty trucks (with a Gross Vehicle Weight Rating of less than 14,000 pounds), or otherwise $40,000 for vehicles like electric buses and semi-trucks (with a GVWR equal to or greater than 14,000 pounds).
“The release of Treasury’s proposed rules for the commercial clean vehicle credit marks an important step forward in the Biden-Harris Administration’s work to lower transportation costs and strengthen U.S. energy security,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo in a statement Friday. “Today’s guidance will provide the clarity and certainty needed to grow investment in clean vehicle manufacturing.”
The NPRM issued today proposes rules to implement the 45W credit, including proposing various pathways for taxpayers to determine the incremental cost of a qualifying commercial clean vehicle for purposes of calculating the amount of 45W credit. For example, the NPRM proposes that taxpayers can continue to use the incremental cost safe harbors such as those set out in Notice 2023-9 and Notice 2024-5, may rely on a manufacturer’s written cost determination to determine the incremental cost of a qualifying commercial clean vehicle, or may calculate the incremental cost of a qualifying clean vehicle versus an internal combustion engine (ICE) vehicle based on the differing costs of the vehicle powertrains.
The NPRM also proposes rules regarding the types of vehicles that qualify for the credit and aligns certain definitional concepts with those applicable to the 30D and 25E credits. In addition, the NPRM proposes that vehicles are only eligible if they are used 100% for trade or business, excepting de minimis personal use, and that the 45W credit is disallowed for qualified commercial clean vehicles that were previously allowed a clean vehicle credit under 30D or 45W.
The notice asks for comments over the next 60 days on the proposed regulations such as issues related to off-road mobile machinery, including approaches that might be adopted in applying the definition of mobile machinery to off-road vehicles and whether to create a product identification number system for such machinery in order to comply with statutory requirements. A public hearing is scheduled for April 28, 2025.
Clean Fuels Production Credit
The Treasury the IRS also released guidance Friday on the Clean Fuels Production Credit under Section 45Z of the Tax Code.
Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel and non-SAF transportation fuels.
The guidance includes both a
“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” said Adeyemo in a statement. “Decarbonizing transportation and lowering costs is a win-win for America.”
Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act credits for biodiesel, renewable diesel, and alternative fuels, and an IRA credit for sustainable aviation fuel. Like several other IRA credits, Section 45Z requires the Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”
The guidance offers more clarity on various issues, including which entities and fuels are eligible for the credit, and how taxpayers determine lifecycle emissions. Specifically, the guidance outlines the Treasury and the IRS’s intent to define key concepts and provide certain rules in a future rulemaking, including clarifying who is eligible for a credit.
The Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the 45Z credit. In keeping with the statute, compressors and blenders of fuel would not be eligible.
Under Section 45Z, a fuel must be “suitable for use” as a transportation fuel. The Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.
Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable. Additionally, natural gas alternatives such as renewable natural gas would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.
Today’s guidance publishes the annual emissions rate table that directs taxpayers to the appropriate methodologies for calculating carbon intensities for types and categories of 45Z-eligible fuels.
The table directs taxpayers to use the 45ZCF-GREET model to determine the emissions rate of non-SAF transportation fuel, and either the 45ZCF-GREET model or methodologies from the International Civil Aviation Organization (“CORSIA Default” or “CORSIA Actual”) for SAF.
Taxpayers can use the Provisional Emissions Rate process to obtain an emissions rate for fuel pathway and feedstock combinations not specified in the emissions rate table when guidance is published for the PER process. Guidance for the PER process is expected at a later date.
Outlining climate smart agriculture practices
The guidance released Friday states that the Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.
CSA practices have multiple benefits, including lower overall GHG emissions associated with biofuels production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health. Agencies across the Federal government have taken important steps to advance the adoption of CSA. In April, Treasury established a first-of-its-kind pilot program to encourage CSA practices within guidance on the section 40B SAF tax credit. Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program. The U.S. Department of Agriculture invested more than $3 billion in 135 Partnerships for Climate-Smart Commodities projects. Combined with the historic investment of $19.5 billion in CSA from the Inflation Reduction Act, the department is estimated to support CSA implementation on over 225 million acres in the next 5 years as well as measurement, monitoring, reporting, and verification to better understand the climate impacts of these practices.
In addition, in June, the U.S. Department of Agriculture published a Request for Information requesting public input on procedures for reporting and verification of CSA practices and measurement of related emissions benefits, and received substantial input from a wide array of stakeholders. The USDA is currently developing voluntary technical guidelines for CSA reporting and verification. The Treasury and the IRS expect to consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the Section 45Z credit.
Accounting
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
The Treasury Department and the Internal Revenue Service issued proposed regulations Friday for several provisions of the SECURE 2.0 Act, including ones related to automatic enrollment in 401(k) and 403(b) plans, and the Roth IRA catchup rule.
SECURE 2.0 Act passed at the end of 2022 and contained an
One set of
The proposed regulations include guidance to plan administrators for properly implementing this requirement and are proposed to apply to plan years that start more than six months after the date that final regulations are issued. Before the final regulations are applicable, plan administrators need to apply a reasonable, good faith interpretation of the statute.
Roth IRA catchup contributions
The Treasury and the IRS also issued
That includes proposed rules related to a provision requiring that catch-up contributions made by certain higher-income participants be designated as after-tax Roth contributions.
The proposed regulations provide guidance for plan administrators to implement and comply with the new Roth catch-up rule and reflect comments received in response to
The proposed regulations also provide guidance relating to the increased catch-up contribution limit under the SECURE 2.0 Act for certain retirement plan participants. Affected participants include employees between the ages of 60-63 and employees in newly established SIMPLE plans.
The IRS and the Treasury are asking for comments on both sets of proposed regulations.
New IRS regs put some partnership transactions under spotlight
Treasury, IRS propose rules on commercial clean vehicles, issue guidance on clean fuels
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
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