11.13 Unified Tax Audits of Partnerships

Tax audits of both a partnership of more than 10 partners and its partners must be at the partnership level. To challenge the partnership treatment of an item, the IRS must generally audit the partnership, not the individual partner. To avoid a personal audit of a partnership item, a partner should report partnership items as shown on the partnership return or identify any inconsistent treatment on his or her return. Otherwise, the IRS may assess a deficiency without auditing the partnership.

For a partnership-level audit, the partnership names a “tax matters partner” (TMP) to receive notice of the audit. If one is not named, the IRS will treat as a TMP the general partner having the largest interest in partnership profits at the end of the taxable year involved in the audit. Notice of the audit must also be given to the other partners. All partners may participate in the partnership audit. If the IRS settles with some partners, it is not required to offer consistent settlement terms. However, the IRS is required to apply the tax law consistently.

Within 90 days after the IRS mails its final determination, the TMP may appeal to the Tax Court; individual partners have an additional 60 days to file a court petition if the TMP does not do so. An appeal may also be filed in a federal district court or the claims court if the petitioning partner first deposits with the IRS an amount equal to the tax that would be owed if the IRS determination were sustained. A Tax Court petition takes precedence over petitions filed in other courts. The first Tax Court petition filed is heard; if other partners have also filed petitions, their cases will be dismissed. If no Tax Court petitions are filed, the first petition filed in federal district court or the claims court takes precedence. Regardless of which petition takes precedence, all partners who hold an interest during the taxable year involved will be bound by the decision (unless the statute of limitations with respect to that partner has run out).

Exception for 10 or fewer partners.

The unified audit rules do not apply if there are 10 or fewer partners. The exception applies if all the partners are individuals (but not nonresident aliens), estates of deceased partners, or C corporations. A husband and wife (and their estates) are treated as one partner.