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.
Archer-Daniels-Midland Co. restated previous earnings, after earlier this month identifying new accounting errors, in a key step to regain investor confidence.
Consolidated results for 2023 and the first two quarters of this year haven’t been impacted by the review, the Chicago-based trader said in a statement. The restatements, which ADM said would be necessary when the accounting errors were announced, corrected figures for transactions within and between ADM’s businesses.
The move by ADM follows an accounting scandal that has since January wiped out billions of dollars in market value and drawn investigations by the Department of Justice and Securities and Exchange Commission. ADM has replaced its
Daniel Acker/Bloomberg
ADM has identified and corrected sales between units that either were previously recorded at prices that didn’t approximate the market, or included transactions that were improperly classified. So-called intersegment sales for 2023 had been previously overestimated by $1.28 billion, according to Monday’s statement. Still, operating profits for each of ADM’s three units remained the same as previously reported.
Shares of ADM were little changed in after-market trading Monday. The stock has lost 27% this year, which compares with a 9.6% decline for main rival Bunge Global SA.
The company also released third-quarter earnings that were consistent with a preliminary report released earlier this month. Adjusted earnings missed the average analyst estimate.
President-elect Donald Trump and his Republican party clarified one aspect of the uncertainty surrounding taxes with a resounding victory in the election.
That means that the many expiring provisions of the Tax Cuts and Jobs Act of 2017 — which Trump signed into law in his first term — are much more likely to remain in force after their potential sunset date at the end of next year. Financial advisors and tax professionals can act without worrying that the rules will shift underneath them to favor much higher income duties.
However, the result also presents Trump and incoming Senate Majority Leader John Thune of South Dakota and House Speaker Mike Johnson of Louisiana with a series of thorny tax policy questions that have tricky, time-sensitive implications, according to Anna Taylor,
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Considering the fact that
“They’re going to have to pick their budget number on the front end,” Taylor said. “They’re going to have to pick that number and put it in the budget resolution, and then they’ll kind of back into their policy so that their policies will fit within their budget constraints. And once you get into that process, you can do a lot in the tax base, but there are still limits. I mean, you can’t do anything that affects the Social Security program. So they won’t be able to do the president’s proposal on getting rid of taxes on Social Security benefits.”
Individual House GOP members will exercise their strength in the negotiations as well, and the current limit on
The president-elect and his Congressional allies will have to find the balance amid the “real tension” between members from New York and California and those from low-tax states such as Florida or Texas who will view any increases to the limit as “too much of a giveaway for the wealthy New Yorkers and Californians,” he said.
“You will need almost perfect unity — more so in the House than the Senate,” Traub said. “This really gives a lot of power, I think, to any small group of House members who decide that they will lie down on the train tracks to block a bill they don’t like or to enforce the inclusion of a provision that they really want. I think the place we’ll watch the most closely at the get-go is over the SALT cap.”
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Estimates of
The Treasury Department could “use their extraordinary measures to get them through a few more months before they actually have to deal with the limit,” she said.
“But they’re going to have to make a decision,” Taylor continued. “Are they going to try to do the debt limit first, maybe roll it into some sort of appropriations deal early in the year? Or are they going to try to do the debt limit with taxes, and then that’s going to really force them to move really quickly on taxes? So, I don’t know. I don’t know that they have an answer to that yet. I’ll be really interested to see what they say in terms of how they’re going to move that limit, because they’re going to have to do that at some point — rather soon, too.”
Looking further into the future at the end of next year with
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Both parties have used reconciliation in the wake of the last two presidential elections. A continuing resolution-style patch on a temporary basis would have been more likely with divided government, he said.
“Had that been what the voters called for last Tuesday, I think that the odds of a short-term extension into 2025 would have been a lot higher,” Traub said. “I don’t think that anybody in the GOP majority right now is thinking about a short-term extension. They are thinking about, ‘We have an unusual ability now to use reconciliation to affect major policy changes.'”
The deal will grow Aprio’s geographic footprint while enabling it to expand into new local markets and industries. Financial terms were not disclosed. Aprio ranked No. 25 on Accounting Today’s 2024 list of the Top 100 Firms, with $420.79 million in annual revenue, 210 partners and 1,851 professionals. The deal will add five partners and 31 professionals to Aprio.
In July,
KKB has been operating for six decades offering accounting, tax, and business advisory services to industries including construction, real estate, professional services, retail, and manufacturing. “There is tremendous synergy between Aprio and KKB, which enables us to further elevate our tax, accounting and advisory capabilities and deepen our roots across California,” said Aprio CEO Richard Kopelman in a statement. “Continuing to build out our presence across the West Coast is an important part of our growth strategy and KKB is the right partner to launch our first location in Southern California. Together, we will bring even more robust insights, perspectives and solutions to our clients to help them propel forward.”
The Woodland Hills office will become Aprio’s third in California, in addition to its locations further north in San Francisco and Walnut Creek. Joe Tarasco of Accountants Advisory served as the advisor to Aprio on the transaction.
“We are thrilled to become part of Aprio’s vision for the future,” said KKB managing partner Carisa Ferrer in a statement. “Over the past 60 years, KKB has grown from the ground up to suit the unique and complex challenges of our clients. As we move forward with our combined knowledge, we will accelerate our ability to leverage innovative talent, business processes, cutting-edge technologies, and advanced solutions to help our clients with even greater precision and care.”
Aprio has completed over 20 mergers and acquisitions since 2017, adding
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