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AICPA Issues Technical Guidance for IRS Audits of Partnerships

April 23, 2018

A recent Technical Question & Answer (“TQA”) document from the American Institute of Certified Public Accountants provides guidance on complying with the Internal Revenue Service’s (“IRS”) new approach to auditing partnerships for income taxes. TQA 7200.09, Partnerships Tax Accounting Considerations Under Partnership Audit Regime, clarifies whether a previous year’s underpayment signifies an income tax liability of the partnership or the individual partners.

Per the guidance, Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 740, Income Taxes  FASB ASC 740-10-55-226, Income Taxes — Overall — Implementation Guidance and Illustrations — Attribution of Income Taxes to the Entity or Its Owners, through FASB ASC 740-10-55-229, Financial Statements of a Group of Related Entities covers the issue. If the taxes paid by the entity are attributable to the entity, then the taxes must be accounted for using the accounting model FASB ASC 740.  If the taxes are attributable to the owners, then they must be treated as a transaction with the owners.

TQA 7200.09 answers that question. Because the IRS’ audit changes aim to help the government collect underpaid income taxes from partners in prior periods, income taxes on partnership income, irrespective of when paid, must be attributed to the partners. As a result, partnerships would not use FASB ASC 740 to explain the amounts paid to the IRS for past underpayment of tax, interest and penalties. Instead, a payment submitted by the partnership under the IRS’ new audit regime must be considered a distribution from the partnership to the partners in the partnership’s financial statements.

In addition to TQA 7200.09, the AICPA issued new guidance concerning engagements with multiemployer benefit plans as stated by AT-C Section 215, “Agreed-Upon Procedures Engagements.” TQA 6935.03, Multiemployer Plans: Multiemployer Plan Payroll Compliance Services—Engagement Letter, to 6935.06, Multiemployer Plans: Multiemployer Plan Payroll Compliance Services — Use of AUP or Other Reports as Audit Evidence, answers questions on engagement and representation letters and evidence to support the accountant’s work. The technical guidance says that according to AU-C Section 500, “Audit Evidence,” if management or another practitioner prepares information that the plan auditor uses for audit evidence, then the plan auditor must consider that information’s significance and reliability.

For more information, check out Cherry Bekaert’s tax alert on the new partnership audit rules.