Partnership Tax/TEFRA

Maryland Business Tax Lawyer Handling Complex Partnership/TEFRA Issues

The attorneys at US International Tax Advisors have extensive experience guiding clients through the complex tax laws and regulations governing partnerships and individual partners.  Our lawyers counsel and advise partnerships, LLCs taxed as partnerships, and other entities throughout the Maryland region and across the U.S. dealing with complicated tax law matters and disputes.  We are a strong and aggressive tax law team that is well-positioned to help our clients resolve sensitive tax law issues, including representing clients in IRS audits of their partnership activities.  

When the accuracy of a partnership tax return is in question, the IRS will ordinarily audit the partnership to determine whether it properly treated and reported its income and losses.  A partnership audit can be complex because partnerships are not treated as separate business entities and therefore do not pay taxes on the income they report to the IRS.  Rather, the individual partners in the partnership are required to report income and losses from the partnership on their personal federal tax returns.  If the IRS audit of the partnership uncovers a tax deficiency or refund, the deficiency or refund will be applied to the partner’s federal tax returns.

Partnership Tax and TEFRA

Prior to the 1982 passage of The Tax Equity and Fiscal Responsibility Act of (TEFRA), when the IRS initiated an audit of a partnership, the IRS had to identify and analyze the personal federal tax return of every partner in the partnership.  As one may imagine, this process was very burdensome for both the IRS and all of the partners involved in the audit.  TEFRA significantly lessened these burdens by reforming the IRS’ examination procedures for partnerships.  Under TEFRA, partnerships are now audited at the partnership level, rather than through individual partner-level proceedings.  Additionally, in an effort to better identify and combat tax evasion and other tax-related crimes, TEFRA requires each partner to report income both through the partnership’s joint tax form and their own personal federal income tax form. 

Almost all partnerships must follow TEFRA rules unless they qualify for the “small partnership exception.”  A partnership with 10 or fewer partners throughout the tax year being examined may qualify for the small partnership exception.  The IRS cautions partnerships that even if they meet the size requirement, there are a number of additional criteria they must satisfy to pass the small partnership exception test.   Moreover, where a partnership does qualify for the exception, the partnership may choose to be subject to the TEFRA rules by filing Form 8893 (Election of Partnership Level Tax Treatment) or  including an election statement to the partnership return for the first year in which the election is to be effective.

TEFRA partnerships may elect to appoint a “tax matters partner” under TEFRA rules.  In addition to other specific duties, the tax matters partner is responsible for representing the partnership before the IRS and in federal civil tax litigation matters.

Contact the Maryland Offices of US International Tax Advisors

TEFRA and other tax rules governing partnerships and partners can be very complicated to sort through on your own.  If you have questions about partnership taxes or are under audit by the IRS, contact an experienced tax law attorney in the Maryland offices of US International Tax Advisors today at (844) 796-8565.