IRS Withdraws Proposed Partnership Audit Regulations

As we discussed in our previous article, on January 18, the IRS and Treasury Department issued proposed regulations implementing a centralized partnership audit regime set to take effect in 2018. Two days later, the White House announced a temporary freeze on new regulations and instructed federal agencies to withdraw any regulations sent to the Office of the Federal Register, but not yet published, pending further review. In response to the freeze, the IRS has withdrawn the proposed regulations.

It’s uncertain how the new administration’s review will affect the partnership audit regulations. But the freeze doesn’t change the fact that the new audit rules — enacted by the Bipartisan Budget Act of 2015 and amended by the Protecting Americans from Tax Hikes Act of 2015 — will take effect on January 1, 2018, absent Congressional action. The proposed regulations were intended to clarify the rules, and any significant delay will cause uncertainty among affected taxpayers about how to comply with them.

Note: On January 24, two other tax regulations were published in the Federal Register: One regarding qualifying income of publicly traded partnerships under Internal Revenue Code Section 7704 and one regarding withholding on dividend equivalent payments under Section 871(m). These regulations were not affected by the freeze because their January 19, 2017, effective date preceded the date the freeze was issued (although they could be repealed by Congress).