Accounting

Partnerships get options for fixing tax errors

Published

4 months ago

December 5, 2024

The Internal Revenue Service has been stepping up its audits of large partnerships lately, but partnerships have some ways to correct errors on the returns they’ve already filed to help them avoid closer scrutiny.

In October, a field operations unit within the IRS’s Large Business and International Division began operations with the goal of streamlining audits of pass-through entities such as partnerships. The IRS gained the authority to do its partnership audits more efficiently under the Bipartisan Budget Act of 2015 through a centralized regime for examining an entire firm as a whole, rather than laboriously scrutinizing each partner individually.

The centralized audit regime is probably the best known change for partnerships under the BBA, but there are others that partners should keep in mind when it comes to their tax returns.

In general, a partnership that’s subject to the BBA’s centralized partnership audit regime can’t file amended returns or amended Schedule K-1s, but instead needs to file an administrative adjustment request, or AAR, to make a change to a previously filed partnership return.

“In order to correct errors in partnership returns, the Bipartisan Budget Act of 2015 changed the rules,” said Rochelle Hodes, Washington National Tax Office principal at the Top 25 Firm Crowe LLP. “There are no more amended returns. Everybody has to use the AAR process, except those few taxpayers who have elected out of the BBA regime. Election out of the regime is very limited. Tiered partnerships can’t elect out. Partnerships with trusts and partners with disregarded entities can’t elect out. Partnerships who have S corps with partners in some cases can elect out. But for the most part, unless you have a partnership that has all individuals or all C corporations as partners, they’re going to be covered by BBA, and they’re not going to be able to do amended returns anymore, so they’re going to have to use this AAR process for correction of errors.”

The AAR process may be unfamiliar to many firms. “Even though the rules have been in effect generally for partnership taxable years beginning on or after Jan. 1, 2018, a lot of taxpayers and practitioners are only now just dipping a toe into having to use these new procedures,” said Hodes. “Historically, a lot of partnerships did not amend returns, and if they did, they would send out amended returns and corrected K-1’s. Under the new process, a different set of forms gets filed and effectively the adjustment to the prior year and the tax resulting therefrom is figured on a pro forma kind of basis. You figure out how much tax difference there is when you correct the error, and then you take that tax difference and you move it up to the ‘current year.’ That’s when you pay the tax that results.”

When there’s a mistake that’s not a numeric error like an incorrect amount of income, but instead the partnership neglected to attach a form or make a Section 754 election to adjust the basis of property, then it needs to follow the new AAR process. The American Institute of CPAs has asked the IRS to create an “EZ” process for simple adjustments or omitted forms and elections.

“When nothing else is changed on the return and you just forgot to attach the statement, you have to do this more complicated AAR process to attach the statement,” said Hodes.

However, there may be help on the way. “It’s my understanding that the IRS is going to be coming out with a more streamlined process for correcting errors like that,” said Hodes. “It’s something that AICPA has been asking for for a number of years now. The AICPA calls it the AAR-EZ, like the easy form. And it’s my understanding that’s something that is close to coming out, so that should be welcomed.”

The 2015 BBA law made it easier for the IRS to audit a large complex partnership such as a private equity firm, changing the rules previously enacted under the Tax Equity and Fiscal Responsibility Act of 1982, also known as TEFRA. But the process for formulating the regulations for the centralized audit regime has taken years to play out, as lobbying groups for PE firms and hedge funds lobbied lawmakers on Capitol Hill to weaken the rules. They have options such as the “pushout election.”

“Partnerships are not taxpaying entities,” said Hodes. “Previously for the IRS to collect any tax due, generally under TEFRA, they would audit the partnership, make adjustments to items, and then the IRS had to flow those adjustments through and find taxpaying partners, and those taxpaying partners then had an opportunity to, in many cases, go to the Tax Court and challenge whether they owed the amounts or not, so the IRS didn’t get their money right away. What the BBA does is it says, look, let’s get this tax thing all set up. We’ll do a stand-in for the tax that would have been owed. We’ll do it close enough, and we’ll take all the adjustments that the IRS made, we’ll multiply it by the highest rate, which happens at this point in time to be 37%, and the partnership can pay the tax, and we’ll call it a day, and that will be much easier, so the IRS won’t have to do any of that work, and the individual partners won’t be able to challenge, and the fisc will be protected. When the BBA rules legislation was first being drafted, that’s how the rules lined up. But groups went to the Hill and said, ‘But that’s not fair, because if you take into account the individual partners’ particular circumstances, the tax that’s going to get paid is far less, and there should be a system to allow the individual partner’s circumstances to be taken into account.’ And thus, the pushout election was born.”

A partnership filing an AAR can decide whether to pay any tax attributable to taking the adjustments into account (called an imputed underpayment) or push the adjustments out to the reviewed year partners, according to an advisory from Crowe co-written by Hodes. A partnership that pushes out the adjustments needs to furnish each partner a Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s),” showing the partner’s allocable share of the adjustments and file copies of the Form 8986 and Form 8985, “Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227),” with the IRS. The forms have to be filed and furnished when the AAR is filed.

“Under TEFRA the IRS had to flow through the adjustments to the partners, and it was a lot of work for the IRS and a lot of man hours for the IRS, and they could only do so few because of all that work,” said Hodes. “The burden has now shifted to the partnership. If you want to flow it through partnership, you and all the partners in the tiers will now have to bear that burden, and they flow through the adjustments.”

A pushout can occur in the context of an examination, an IRS audit or an AAR. “An audit is when the IRS makes adjustments,” said Hodes. “An AAR is when the partnership, on its own, makes an adjustment. And in the case of an AAR, Congress made the decision in statute and said, You know what? If those adjustments are taxpayer favorable, the partnership must push out those adjustments if you’re doing an AAR. If you’re correcting something because you didn’t give your partners enough of the good stuff, we have made the policy call in Congress that if you’re going to do it yourself, you need to send that good stuff out to the partners. In my experience, most AARs involve a pushout, and that is a big part of what’s making these AARs so complex. In many cases, an AAR is going to have both taxpayer favorable and some taxpayer unfavorable items. But so long as you have a tax favorable item, you’ve got to do the push, so why not just push everything? It is a rare circumstance where I have seen the partnership pay the [imputed underpayment] and not do a pushout.”

The IRS has made efforts to crack down on tax evasion by large partnerships, but that could change with the incoming Trump administration. On Wednesday, President-elect Trump announced that he would be replacing IRS commissioner Danny Werfel, who has made a priority of emphasizing the large partnership audits, before the end of Werfel’s term in 2027 with former Rep. Billy Long, R-Missouri, who has promoted use of the Employee Retention Credit. That could mean large partnerships will be able to continue to avoid audits.

“You previously had an audit rate of partnerships of zero or quite near zero,” said Hodes. “Meanwhile, over the past 50 or 40 years, we have seen more and more assets in the economy flow through partnership structures, as opposed to corporate structures. But partnerships are complex.”

The AAR process and the pushout election made large partnership audits even more complicated for the IRS. She noted that the regulations in 301.9100-2 include a correction opportunity for errors if they’re caught within a six-month or a 12-month period after the return is filed. A late election under Section 754 is also included in that correction process for taxpayers that file and attach an AAR.

“It’s a good thing to keep in mind,” said Hodes. “I had a boss who once told me that the ability to correct mistakes is the reason why pencils have erasers, and 9100 relief processes are intended to not punish people for ministerial oops’s. It’s just something to keep in mind that there are opportunities to obtain relief.”

She also pointed out that the IRS is offering extensions in many parts of the country that have been affected by natural disasters. “There were a lot of disasters in 2024, and due dates and such have been extended,” said Hodes. “When you think you might have been late, you might not have been late in filing or with payment. As you go through and look to see if you have errors, it’s important to keep in mind opportunities for relief through the disaster rules as well, if they’re applicable.”

Accounting

IRS employee union requests emergency relief

Published

1 day ago

April 4, 2025

Business Finance News

The National Treasury Employees Union, which represents workers at the Internal Revenue Service among 37 federal agencies and offices, has asked a federal judge for emergency relief to preserve the union rights of federal employees while NTEU’s legal challenge to President Trump’s executive order stripping unions of collective bargaining rights can be heard in court.

Trump signed an executive order last Thursday removing the requirements from employees at agencies including the Treasury Department that he deemed to have national security missions. On Monday, the NTEU filed a lawsuit to stop the move arguing that Trump’s rationale for protecting national security was just a way to end union protections for federal workers. The administration also wants to prevent the unions from collecting dues automatically withheld from employee paychecks.

NTEU’s request for a preliminary injunction was filed Friday with U.S. District Judge Paul Friedman.

“NTEU seeks emergency relief to protect itself and the workers it represents from this unlawful attempt to eliminate collective bargaining for some two-thirds of the federal workforce,” the request stated.

The NTEU contended that the Trump administration’s executive order claims that allowing workers to join a union was a threat to national security were absurd.

“We all know this has nothing to do with national security and that the true goal here is to make it easier to fire federal employees across government,” said NTEU national president Doreen Greenwald in a statement Friday. “Just five days after declaring the administration would no longer honor our contract with Health and Human Services, thousands of brilliant civil servants who work tirelessly to improve public health were let go for spurious reasons and little recourse to fight back.”

The union pointed out that Congress declared 47 years ago that collective bargaining in the federal sector was in the public’s interest by giving employees a voice in the workplace and allowing labor and management to work together. It acknowledged there is a narrow exemption in the law for groups of employees whose work directly impacts national security, but argued that Trump’s executive order is blatant retaliation against federal sector unions and ignores the laws passed by Congress creating the agencies.

In agencies where a reduction-in-force has been announced, NTEU’s contracts provide time for employees to respond to a RIF notice and explore alternatives to mitigate the impact of the layoffs.

Earlier this week, after two court rulings in California and Maryland, the IRS’s acting commissioner, Melanie Krause, announced the IRS would be bringing back approximately 7,000 probationary employees who had been fired and then put on paid administrative leave.

A bipartisan bill has been introduced in Congress to preserve collective bargaining rights for federal employees. The Protect America’s Workforce Act (H.R. 2550), sponsored by Rep. Jared Golden, D-Maine, and Brian Fitzpatrick, R-Pennsylvania, would overturn Trump’s executive order stripping collective bargaining rights from hundreds of thousands of federal workers at multiple agencies. Separately, eight House Republicans and every House and Senate Democrat have sent letters to the White House condemning the executive order.

Accounting

Estate planning for the Tax Cuts and Jobs Act expiration

Published

1 day ago

April 4, 2025

Business Finance News

The political calculus involved with the details of estate planning next year and beyond may be distracting financial advisors and clients from a larger, simpler conversation, one expert says.

On the off chance that the federal estate-tax exemption levels of $13.99 million for individuals (and double for couples) revert to half those amounts when Tax Cuts and Jobs Act provisions expire in 2026, only 0.2% of households would face potential duties upon transfer of assets, according to Ben Rizzuto, a wealth strategist with Janus Henderson Investors‘ Specialist Consulting Group. He predicted that most financial advisors and high net worth clients, such as those he works with and others across the industry, will see no changes.

With few other revenue-raising provisions available to President Donald Trump and Republican lawmakers, they’re not likely to shield all estates from payments to Uncle Sam — as much as they might like to play undertaker to the “Death of the Death Tax,” Rizzuto said, using the label for estate taxes adopted by critics favoring bills like the “Death Tax Repeal Act.” Lawmakers’ decisions on future exemptions from the taxes (and when they make those decisions) remain out of advisors’ control. Meanwhile, they must remind clients that estate planning is much more than having a will and avoiding taxes, Rizzuto said.

“For financial advisors and clients, I would expect for many of them not to have to worry about federal estate taxes next year,” he said in an interview. “Even though they may not have to worry about it, there are still a lot of good conversations to be had.”

The 1%

Trust tools that reduce the value of the assets that will transfer to spouses or other beneficiaries upon a client’s death, combined with the available statistics about the shrinking share of estates subject to taxes, could bring some peace of mind to clients. The 2017 tax law itself pushed down estate tax liability as a percentage of gross domestic product to a quarter of its 2001 level, according to an analysis by the “Budget Model” of the University of Pennsylvania’s Wharton School. Just two years after the law’s passage, the number of taxable estates had plummeted to 1,275 — or 1% of the number at the beginning of the century.

At the same time, advisors could raise any number of questions with clients about their estates that involve varying degrees of expertise and collaboration with outside professionals. And many surveys have found that clients are expecting them to do so. For example, at least 70% out of a group of 10,000 adults contacted in January by WeAreTalker (formerly OnePoll) on behalf of online legal information service Trust & Will said advisors should offer estate planning. In addition, 40% of the group said they would switch to an advisor who provided that service.

“We’re seeing a fundamental shift in client expectations,” Trust & Will CEO Cody Barbo said in a statement. “The findings are clear. Advisors who fail to integrate estate planning into their practice aren’t just missing an opportunity; they are facing a threat to their client base as wealth transfers to younger generations over the next two decades.”

Get back to the planning basics

In that context, advisors and their clients should steer clear of trying to make sense of a complicated, ever-changing flow of news from Capitol Hill as Trump and the GOP pursue major tax legislation with a year-end deadline, Rizzuto said. If clients truly could be on the hook for estate taxes, a grantor retained annuity trust, a spousal lifetime access trust or gifting strategies may eliminate the possibility. One method involved with the latter could set them up in the future to receive stock that is “highly appreciated with lower basis,” Rizzuto noted, citing the example of equities that have gained a lot of value that a client could give to their parents.

“Why not gift them upstream?” Rizzuto said. “My father holds it. I tell him, ‘Dad, you have to do these things: Live for another 12 months, make sure you don’t sell, make sure that you update your will or your instructions to gift it back to me when you die.’ That’s another idea that we’ve been talking about with advisors.”

From another perspective, these possible paths forward may beckon to clients this year, if they are tuning into Beltway news about the progress of the tax legislation, he said. To bypass the risk of client perceptions that their advisor isn’t doing any tax planning at all, Washington’s complex maneuvering around the future rules is, “if nothing else,” a “great opportunity for advisors to bring this up at a very high level,” Rizzuto said.

“Advisors will really need to go back to basics and have some foundational conversations with clients,” he said, suggesting their goals with taxes as one key point of discussion. “‘What is it that we actually control within your financial and tax plan?’ When it comes right down to it, it’s really just incomes and deductions.”

Accounting

Developing future leaders in accounting: the new imperative in an AI and automation driven era

Published

1 day ago

April 4, 2025

Business Finance News

As technology continues to automate routine tasks, the role of finance professionals is evolving, demanding deeper capabilities in critical thinking, communication and business acumen.

Many of PrimeGlobal’s North American firms are focused on cultivating these skills in their future leaders. Carla McCall, managing partner at AAFCPAs, Randy Nail, CEO of HoganTaylor, and Grassi managing partner Louis Grassi shared their views with PrimeGlobal CEO Steve Heathcote on the need for future leaders to balance technological proficiency with human-centered skills to thrive.

AI is transforming the sector by streamlining workflows, automating data analysis and reducing manual processes. However, rather than replacing accountants, AI is reshaping their roles, enabling them to focus on higher-value tasks. In the words of Louis Grassi, AI can be seen as a strategic partner, freeing accountants from routine tasks, enabling deeper engagement with clients, more thoughtful analysis, and ultimately better decision-making.

Nail emphasized the importance of embracing AI, warning that those who fail to adapt risk being replaced by professionals who leverage the technology more effectively. HoganTaylor’s “innovation sprint” generated over 100 ideas for AI integration, underscoring why a proactive approach to adopting new technologies is so necessary and valuable.

McCall advocates for an educational shift that equips professionals with the skills to interpret AI-generated insights. She stressed that accounting curricula of the future must evolve to incorporate advanced technology training, ensuring future accountants are well-versed in AI tools and data analytics. Moreover, simulation-based learning is becoming increasingly crucial as traditional methods of education become obsolete in the face of automation.

Talent development and leadership growth

As AI reshapes the profession, firms must rethink how they develop and nurture their future leaders. To attract and retain top talent, firms need to prioritize personalized development plans that align with individual career goals.

HoganTaylor’s approach to talent development integrates technical expertise with leadership and communication training. These initiatives ensure professionals are not only proficient in accounting principles but also equipped to lead teams and navigate complex client interactions.

Nail underscored the growing importance of writing and presentation skills, as AI will handle routine tasks, leaving professionals to focus on higher-level analytical and decision-making responsibilities.

Soft skills are the success skills

While technical proficiency remains vital, future leaders must also cultivate critical thinking, communication and adaptability — skills McCall refers to as the “success skills.” McCall highlights the necessity of business acumen and analytical communication, essential for interpreting data, advising clients and making strategic decisions.

Recognizing teamwork and collaboration remain crucial in the hybrid work environment, McCall explained in detail how AAFCPA fosters collaboration through structured remote engagement strategies such as “intentional office time,” alcove sessions and stand-up meetings. Similarly, HoganTaylor supports remote teams by offering training for career advisors to ensure effective mentorship and engagement in a dispersed workforce.

McCall emphasized why global experience can be valuable in leadership development. Exposure to diverse markets and accounting practices enhances professionals’ adaptability and broadens their perspectives, preparing them for leadership roles in an increasingly interconnected world.

Grassi reminded us that an often-overlooked leadership skill is curiosity. In his view the most effective leaders of tomorrow will be inherently curious — not just about emerging technologies but about clients, market shifts and global trends. Encouraging curiosity and continuous learning within our firms will distinguish the true industry leaders from those simply reacting to change.

A balanced future

What’s clear from speaking to our leaders is PrimeGlobal’s role in fostering trust, community and knowledge sharing. McCall recommended member-driven panels to discuss AI implementation and automation strategies and share best practice. Nail, on the other hand, valued PrimeGlobal’s focus on addressing critical industry issues and encouraged continuous evolution to meet professionals’ changing needs.

The future of leadership in the accountancy profession hinges on a balanced approach, leveraging AI to enhance efficiency while cultivating essential human skills that technology cannot replicate, which Grassi highlights skills including leadership and building client trust.

As McCall and Nail advocate, the next generation of accountants must be agile thinkers, skilled communicators and strategic decision-makers. Firms that invest in these competencies will not only stay competitive but will also shape the future of the industry by developing well-rounded leaders prepared for the challenges ahead.

By investing in both AI capabilities and essential human skills, firms can not only future proof their leadership but also shape a resilient and forward-thinking profession ready to meet the challenges of the future.

As Grassi concluded, while technical skills provide the foundation, leadership in accounting increasingly demands emotional intelligence, empathy and adaptability. AI will change how we perform our work, but human connection, trust and nuanced judgment are irreplaceable. Investing in these human-centric skills today is critical for firms aiming to build resilient leaders of tomorrow. To remain relevant and thrive, professionals must prioritize developing strong success skills that will define the leaders of tomorrow.