Accounting
Partnerships get options for fixing tax errors
The Internal Revenue Service has been
In October, a
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
“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
“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
“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
“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.”
A Republican proposal to tax remittances would deliver an economic blow to some of the U.S.’s poorest neighbors, including a close ally of President Donald Trump.
The bill, presented to the House of Representatives last week, would levy a 5% tax on remittances for noncitizens and foreign nationals. That’s on top of a roughly 5% to 10% fee already charged on the payments by senders like Western Union Co. and MoneyGram International Inc., services migrants in the U.S. use to send money to family members back home.
The tax would directly hit payments that represent about one-fifth of the gross domestic product of El Salvador, where President Nayib Bukele has formed a strong alliance with the Trump administration by accepting deportees to be imprisoned. Honduras, which hosts a U.S. military base that has facilitated deportations to Venezuela, gets a similar proportion of remittances to the size of its economy, and Guatemala isn’t far behind.
A MoneyGram transfer location in San Salvador, El Salvador.
“It’s not good news for those who receive remittances,” said Carlos Acevedo, former central bank chief for El Salvador. “It might have a negative impact on economic growth.”
Migrants from El Salvador, Guatemala and Honduras sent home record amounts of remittances last year, helping drive economic growth across Central America. Remittance
The funds are used largely for consumption by poorer families who often have few other sources of income. Mexico and Central America are the world’s most dependent areas for remittances sent from the U.S.
“The effect isn’t just macroeconomic, it’s at a microeconomic level too, affecting families,” Guatemala Central Bank chief Alvaro Gonzalez Ricci said in a written response to questions. “The importance of remittances to the Guatemalan economy is growing, not just as a proportion of GDP, but also because the flows of millions of dollars boosts family consumption.”
Gonzalez Ricci said migrants in the U.S. would likely absorb the additional tax, minimizing disruption to the inflows to Guatemala. Some states, especially those with sanctuary cities, will likely oppose the measure, he said.
However,
“That’s very conservative — in other words, it’s your best-case scenario,” he said. “If this were to happen, I can see lots of people going crypto and other people relying on relatives that are U.S. citizens to send money for them.”
Mexican Foreign Affairs Minister Juan Ramon de la Fuente said the government would mount a legal and political defense to stop the plan, while the country’s Ambassador to the U.S. Esteban Moctezuma Barragan urged House representatives to reject the bill in a letter sent May 13. The proposal would mean double taxation of migrant workers who already pay income taxes in the U.S. Mexicans living and working in the U.S. paid $121 billion in taxes in 2021, the ambassador said.
“Imposing a tax on these transfers would disproportionately affect those with the least, without accounting for their ability to pay,” Barragan wrote. “The workers referenced in this bill migrated out of necessity and now contribute substantially to the U.S. economy. We respectfully urge you to reconsider.”
Representatives for the governments of El Salvador and Honduras didn’t reply to requests for comment on the tax proposal.
A trade group of digital payment firms — the Electronic Transactions Association — also urged lawmakers to rethink the proposal. The tax would affect unbanked populations who rely on cross-border transfers as lifelines and could force consumers to send money through unregulated channels, they wrote in a letter on May 8.
“These services are not luxuries — they are essential tools for paying bills, supporting family members abroad and managing daily finances,” the group wrote. “A tax on remittances effectively penalizes those who can least afford it.”
It’s not the first time Trump has taken aim at remittances. During his first term, his administration proposed a similar tax, but it was never implemented because of legal and technical difficulties to discriminate between trade-related and worker outflows, Barclays analysts Gabriel Casillas and Nestor Rodriguez wrote in a note on May 14.
Oklahoma is the sole state in the U.S. that has implemented a similar policy: a $5 fee on any wire transfer under $500 and 1% on any amount in excess of $500, passed in 2009. In the first year after it was put in place, the state brought in
The renewed push for the tax, if approved, could lead to currency depreciations in countries like Guatemala, Honduras and Mexico. But remittances have been resilient even amid recent threats like the COVID-19 pandemic and “such a tax would be a one-time hit rather than a structural change on remittances,” the Barclays analysts wrote.
The U.K.’s accounting watchdog gave a “scathing” and “highly critical” initial report of EY’s conduct in NMC Health Plc’s audit, lawyers for the collapsed hospital operator alleged in the £2 billion ($2.7 billion) trial.
The Financial Reporting Council’s provisional report found EY “demonstrated a complete lack of professional skepticism” and failed “to be alert to conditions that may have indicated possible fraud,” in its last audit of NMC Health for 2018, lawyers for NMC’s administrator, Alvarez & Marsal said in a court filing.
“EY’s Audit of NMC was deficient in multiple respects. These failings are extremely serious,” the FRC’s provisional report concluded, according to court filings by NMC’s lawyers prepared for the lengthy civil trial.
Alvarez & Marsal sued EY in London alleging negligence and failure to spot billions in hidden debt between 2012 and 2018 when EY was the auditor. NMC was put into administration in 2020 following allegations of fraud at the health care provider.
EY has “comprehensively challenged” NMC’s arguments around the report, its lawyers said in court filings. EY denies the allegations and said the claims were “unfounded.”
It is a provisional report that has not been made public until now. The FRC made clear at a pre-trial hearing that the report is not regarded as independent expert opinion, according to EY’s lawyers. “The ‘findings’ on which NMC appears to place such a store, and which EY rejects, are in fact inadmissible and should be disregarded.”
An FRC spokesperson didn’t respond to an email for comment on the status of its final report.
The collapse of NMC sparked a flurry of lawsuits and investigations in the U.K. and U.S. as different sides point the finger of blame. The U.K.’s markets watchdog previously censured the fallen Middle Eastern hospital operator, saying the once listed firm misled investors about its debt position by as much as $4 billion.
Leigh Prather/Leigh Prather – Fotolia
It is getting a little difficult to talk about a post-tax filing season after April 15, 2025. With the use of tax extensions and the number of disaster-relief related extensions, many tax return preparers are seeing the tax filing season continue through the summer and fall.
It was the 70th anniversary of the April 15 tax filing deadline this year. Still, the statistics being reported by the Internal Revenue Service look fairly normal compared to the 2024 tax filing season. By April 18, 2025, the IRS reports that 140,633,000 tax returns had been filed, up about 1.1% from 2024. The IRS notes that typically an additional 10% of returns will be filed by the extended tax deadline of Oct. 15, 2025, representing an additional 16% of tax revenue.
(Read more: “
Further, all or part of 10 states had filing deadlines extended due to natural disasters, with filing deadlines ranging from May 1, 2025, to Nov. 3, 2025. The IRS typically releases an additional filing update in mid-July.
Tax refunds for 2025 of 86,021,000 were similar to 2024. The refund amount was an average of $2,942, up 3.3% from 2024. E-filings by tax professionals were 72,504,000, up by 1.7% from 2024, while self-prepared e-filings were up more modestly to 63,726,000. One interesting statistic from the IRS was that visits to IRS.gov were down significantly from 571,496,000 in 2024 to 322,948,000 in 2025.
The 2025 tax return itself was not too different compared to 2024, except for the usual inflation adjustments. Additional Form 1099-K filings perhaps made the most significant change for 2025 filings.
There were a few provisions from prior tax legislation still coming into effect in 2024, such as the ability to transfer the Clean Vehicle Credit to the dealer, which did result in some confusion and at least temporarily rejected claims for the credit.
Congress in 2024 did not adopt any major tax legislation to add further changes. The 2026 tax filing season could look very different depending upon whether Congress manages to pass new tax legislation this year. Tax professionals will have the expiration of the individual provisions of the Tax Cuts and Jobs Act to deal with if Congress does not act, and potentially new changes to deal with if Congress does act, although it is not clear how many of those changes might be effective for 2025.
Congress
Congress has approved a budget framework for a budget reconciliation tax package with a focus on extending those individual provisions from the Tax Cuts and Jobs Act. However, Congress is also trying to squeeze in some or all of President Trump’s tax proposals, including no tax on Social Security benefits, no tax on overtime, no tax on tips, a possible reduction in the corporate tax rate for domestic manufacturers, a deduction for interest on car loans, and perhaps a modification of the state and local tax deduction limit.
Possible revenue offsets to come within the budget framework numbers include spending cuts, tariff revenue, assumptions about economic growth resulting from the legislation, repeal of some clean energy credits, and using a budget gimmick to assume that extending current provisions in the Tax Code do not require revenue offsets, even though they add to the deficit.
It will be difficult to accomplish everything that congressional Republicans hope to include while also appeasing the deficit hawks among their members and Republican moderates vowing to preserve Medicaid.
The House has already introduced a series of tax bills addressing matters such as timing of receipt of electronic submissions, communication of math adjustments, disaster relief (including tying relief to state as well as federal disaster declarations), the ability to replace stolen checks electronically, and a bill to enhance certain administrative functions.
IRS
For the IRS, along with most of the federal government, it was far from a normal tax season. Having just staffed up for more enforcement, customer service, and technology improvements thanks to funding from the Inflation Reduction Act, the IRS is now facing a possible 25% reduction in its workforce through a deferred resignation program and a voluntary separation incentive program.
In addition, although it is still tied up in the courts, there may still be departures of provisional employees. Leadership at the IRS has also been unstable, with three interim IRS commissioners since IRS Commissioner Daniel Werfel resigned on Jan. 17, 2025.
Other changes announced by the IRS include elimination of the beneficial ownership information reporting requirement for domestic entities and declaring obsolescent a variety of old guidance.
(Read more: “
Congress acted to overturn the IRS requirement for crypto broker DeFi reporting on Form 1099-DA. The IRS also announced the withdrawal of the final regulations on partnership basis-shifting transactions involving related parties as a transaction of interest.
However, Revenue Ruling 2024-14 appears to remain in effect, providing that the economic substance doctrine applies where basis shifting among related parties does not have economic purpose or substance. There are also indications that the IRS Direct File program, which was around for 2024 and 2025, will not be continued for future years.
Summary
The relative stability of the 2025 tax filing season is likely to be very different next tax filing season. Congress hopes to pass major tax legislation, some of which will preserve the status quo but other parts of which will present new tax filing challenges.
It is still too early to ascertain the impact on the IRS; however, the loss of so many employees and leadership turnovers point to less enforcement and compliance activity, and less revenue collected from such activities, including a pullback of the effort to increase partnership audit activity. There could also be a return to declines in customer service.
At the American Bar Association Tax Section meeting in Los Angeles in February 2025, no representatives of the Treasury or the IRS were permitted to attend or participate in the usual discussion panels.
At the time of this writing, the next meeting of the Tax Section was due in mid-May, in Washington, D.C. It will be interesting to see if government panelists are permitted to go the few blocks to the conference. Usually, the exchange of ideas is very helpful to the tax professionals in attendance and to the government personnel seeking comments on proposed guidance.
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