Accounting
Partnership pitfalls under the centralized partnership audit regime
Six years of the Centralized Partnership Audit Regime have elucidated a central understanding: the Bipartisan Budget Act provisions present plenty of potential pitfalls for partnerships, partnership representatives and the partners. The BBA creates a fictitious partnership level tax, imbues the partnership representative with authoritarian control, threatens to create conflict between partners and overhauls the partnership examination requiring key decisions at various stages of the examination process.
BBA examination overview
BBA examinations begin with a Notice of Administrative Proceeding, which is sent only to the partnership representative, who is appointed by the partnership on a timely filed original return for each tax year and charged with the responsibility of representing the partnership in matters involving the Internal Revenue Service. (The partnership representative does not have to be a partner and can be an entity. In the context of an entity representative, the partnership must appoint a representative of the entity – a designated individual – as the point of contact for the IRS.)
Then the IRS will issue a Notice of Preliminary Partnership Examination Changes that gives the PR the ability to raise any disputes with the proposed changes with the IRS Office of Appeals. Next, the IRS will issue a Notice of Proposed Partnership Adjustment. The NOPPA asserts a fictitious partnership-level tax called the imputed underpayment and starts a 270-day clock during which the partnership, working with the individual partners, can request a modification of the imputed underpayment. After the close of that period, the IRS will issue a Final Partnership Adjustment (FPA) that asserts an imputed underpayment (less any adjustments for modifications) and penalties, if applicable. The FPA also starts both a 45-day clock for making a push-out election and a 90-day clock for filing a suit to challenge the IRS determinations. Only the PR acting on behalf of the partnership can bring an action and may do so in the Tax Court or, after making a deposit of the imputed underpayment, penalties, additions to tax and additional amounts, through the U.S. District Court or Court of Federal Claims.
There are a number of pitfalls in the BBA process, but perhaps the most important are those associated with the PR, which replaced the prior tax matters partner (TMP) under the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership regime.
TMP versus PR
Under TEFRA, the TMP, as representative of the partnership, could only bind the non-notice partners, leaving notice partners with options to fight — even to the point of litigation — on their own. A notice partner was any partner in a partnership with 100 or fewer partners. For partnerships larger than that, notice partners were any partners owning 1% or more of the partnership. Partners who owned less than 1% could form a notice group that collectively owned 5% of the partnership (notice group) to obtain notice partner rights.
Under TEFRA, notice partners could file a petition with the U.S. Tax Court if the TMP failed to bring such an action, intervene in any Tax Court settlement, pay their share of any flow-through adjustments and file a claim for refund (and suit for refund). Notice partners were not inherently bound by the decisions of the TMP.
Pitfall 1: The BBA regime eliminates that individualism, imbuing the PR with complete control over the partnership. Under the BBA, notice partners are no more; only the partnership representative can bring a court action, and no partner has a right to intervene in a settlement or litigation. Individual partners no longer have the ability to pay their share and file a suit for refund. The partnership representative has complete authority to bind the partnership, exposing the partnership and the partners.
Modifications: An opportunity for individualism
The modification process offers a glimpse at TEFRA-era individualism. During the 270-day post-NOPPA period, an individual partner can request a modification by filing amended returns for the tax year under audit (and any other affected tax years) to account for their share of the partnership adjustments. The partner must also pay all taxes, penalties and interest associated with the amendments. Once a modification has been made, the imputed underpayment at the partnership level is reduced by the amount allocated to the individual partner. However, the individual partner cannot later file a second amended return to undo the adjustments until or unless a court determines that the partnership-level adjustments were incorrect.
For partnerships, modifications make sense if there is no defense to the adjustments raised by the NOPPA, the modification reduces the effective tax owed by the partners for those that are tax-exempt entities or the long-term strategy involves filing an action in the District Court or Court of Federal Claims. Modifications may help reduce the amount the partnership has to pay to file an action in those courts. For partners that do not trust the PR, this could be the first point of dissension from the partnership because partnerships and partners must work together to facilitate a modification.
Push-out elections
During the 45-day period starting with the issuance of the FPA, the partnership may elect to push out the partnership adjustments to its partners. Push-out elections push the adjustments to the individual partners on a pro-rata basis. Unlike modifications, push-outs do not require consent from the individual partners.
Push-outs can be beneficial if individual partners have tax attributes that would lower the effective tax rate. For example, for an individual partner with large capital gains or loss carryovers, the adjustment may have a lower tax impact than the maximum individual default rate of 37%. Push-out elections may also be beneficial to partnerships with a large number of disassociated partners. Otherwise, the partnership as a whole is on the hook for the imputed underpayment and may lack the funds to cover that tax, forcing a capital call that may produce mixed results.
Pitfall 2: Push-out elections require an intensive process that carries administrative burdens. If any mistakes are made in that process, the IRS can void the election.
Pitfall 3: If the partnership elects to push out the adjustments, the IRS will increase interest on any balance by an additional 2% over the going rates. This could result in increased exposure for the partner.
Pitfall 4: The individual allocations and additional interest could cause inconsistent results among partners. Unlike modifications, push-outs affect every partner. Situations may arise where a push-out helps a partner with a lower effective tax rate but increases out-of-pocket costs for a partner at a 37% effective rate that now has to contend with 2% additional interest.
Pitfall 5: Push-out elections shift responsibility for the adjustment to the partners that make up the partnership in the adjustment year, which is defined as the year in which the adjustment is finalized (the year the FPA is accepted or the year a court decision becomes final). This creates a situation where a partner in the partnership during the year under audit subsequently sells its partnership interest to another taxpayer and avoids liability while sticking the new partner with a liability from a year when they were not even a partner, creating a disconnect between benefits and burdens associated with the adjustments.
This means that each partnership needs to think about the administrative burdens of trying to collect contributions from each partner to pay the tax, the likelihood of a push-out reducing the collective tax by amounts sufficient to offset the additional 2% interest and the possibility that some partners will be worse off with such a decision while others benefit.
A federal court in Texas has issued another preliminary injunction and stay halting enforcement of the Corporate Transparency Act and its beneficial ownership information reporting requirement, which were already on hold following a
The U.S. District Court for the Eastern District of Texas, Tyler Division, issued the preliminary injunction and nationwide stay yesterday. The same district court’s Sherman Division, had
The decision on Tuesday involved a case with a pair of plaintiffs, Samantha Smith and Robert Means, suing the U.S. Treasury Department. They had formed LLCs under Texas law to hold real property in the state. In an
“The Corporate Transparency Act is unprecedented in its breadth and expands federal power beyond constitutional limits,” he wrote. “It mandates the disclosure of personal information from millions of private entities while intruding on an area of traditional state concern.”
He noted that the LLCs do not buy, sell or trade goods or services in interstate commerce or own any interstate or foreign assets.
The CTA passed as part of the National Defense Authorization Act in 2021 and requires businesses to disclose their true owners as a way to deter shell companies from carrying out illicit activities such as money laundering, terrorist financing, human trafficking and tax fraud. Businesses are required to file beneficiai ownership information reports with the Treasury Department’s Financial Crimes Enforcement Network. FinCEN has since
The Texas Public Policy Foundation is representing the two property owners challenging the CTA, arguing that the law violates federal Commerce Clause powers under the Constitution and undermines the principles of limited government and individual liberty.
“The court’s decision affirms the principle that federal government power is not unlimited,” said TPPF general counsel Robert Henneke in a statement Wednesday. “This ruling is a powerful reminder that our Constitution limits federal power to protect individual rights and economic freedom.”
“The government’s theory of power in this case was effectively unlimited,” said Chance Weldon, director of the Center for the American Future at TPPF, in a statement. “The district court’s opinion is not only a win for our clients, but ordinary Americans everywhere.”
The Financial Accounting Foundation today formally opened the search for several leadership roles.
The FAF Board of Trustees’ Appointments Committee is seeking nominations for these positions, which include chair and members of the Board of Trustees, the FAF’s executive director, Financial Accounting Standards Board member, and chair of the Financial Accounting Standards Advisory Council.
FAF executive director
Current FAF executive director John Auchincloss announced in December 2024 that he will
The executive director leads a team of 45 who provide support services to the FASB and the Governmental Accounting Standards Board, including communications and public affairs, legal, IT, human resources, publishing, financial management and administration. The role supports the FAF Trustees, who ultimately oversee the FASB and GASB Boards and their advisory councils. The executive director, in collaboration with the FAF chair, also sets the organization’s U.S. and international outreach strategies.
A full description of the FAF executive director role can be found
FAF Board of Trustees chair
The chair of the FAF Trustees is involved in all major Trustee decisions related to strategy, appointments, oversight and governance, and in representing the organization with high-level stakeholders and regulators.
The new chair will be appointed for a three-year term beginning Jan. 1, 2026, through Dec. 31, 2028, and can stand for reappointment to a second three-year term beginning in 2029.
A full description of the FAF Board chair role can be found
FAF Board of Trustees at-large member
The FAF Board of Trustees oversees and supports the FASB and the GASB, and exercises general oversight of the organization except regarding technical decisions related to standard setting.
The FAF is recruiting several “at-large” trustees — individuals with business, investment, capital markets, accounting, and business academia, financial, government, regulatory, investor advocate, or other experience.
A full description of the FAF trustee role can be found
FASB member
FASB members develop financial reporting standards that result in useful information for investors and other financial-statement users. The FASB member roles are full time and based in Norwalk, Connecticut.
“These are senior and prestigious appointments, demanding not only a high degree of technical accounting expertise but also a high level of understanding of the global financial reporting environment,” the FAF announcement reads.
The official start date for the position would be July 1, 2026, but the newly appointment member would be expected to start some time earlier than year to ensure a successful transition. The five-year term extends through June 30, 2031, at which time the member would be eligible to be considered for reappointment.
A full description of the FASB member role can be found
FASAC chair
The chair is the principal officer of the FASAC and advises the FASB on projects on the FASB’s agenda, possible new agenda items and priorities, procedural matters that may require the attention of the FASB, and other matters. The chair is responsible for guiding discussion at FASAC meetings and for implementing and directing the broad operating processes of the FASAC.
The chair may be appointed for up to a four-year term, or a shorter period of time as agreed upon, and may be eligible for reappointment.
A full description of the FASAC chair role can be found
Courtesy of the FAF, FASB and GASB
Top 10 Firm Grant Thornton announced that its CEO, Seth Siegel, is stepping down from his position after 30 years with the firm, though will still remain involved as a senior advisor.
“I have called Grant Thornton home for almost three decades and am proud to have been part of this amazing team and organization, which has solidified its standing as the destination of choice for clients and talent alike,” said Siegel in the firm’s
The new CEO will be Jim Peko, current chief operating officer of Grant Thornton Advisors LLC.
“I thank Seth for all he has done to help transform Grant Thornton so adeptly for the future. He has been a colleague, mentor and friend to so many of us, and a tireless advocate for the firm’s best interests. As CEO, my priorities will focus on accelerating our current business strategy and solidifying our standing in the marketplace as a unique global platform, driven by quality, culture and differentiated capabilities. We will continue to be the employer of choice for the industry and always capitalize on compelling opportunities before us as we drive meaningful growth,” said Peko.
Siegel expressed his confidence in Peko, saying he has worked closely with him for many years.
“Jim and I have worked closely together for many years, and he is the right leader for this new chapter — one who knows Grant Thornton well and has been integral to our many recent accomplishments and our quality-focused delivery,” he said.
Siegel became a partner in 2006, became managing partner of South Florida in 2020, and
The announcement comes shortly after the
Grant Thornton
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