Navigate the IRS audit storm: Important extension methods for partnerships

CPAs who function tax advisors to entrepreneurs and traders have quite a lot of nervous purchasers lately, and with good cause.

The Inner Income Service is utilizing billions of {dollars} in new funding from the Inflation Discount Act for audits and synthetic intelligence-powered scrutiny of tax returns. A large chunk of this enforcement effort is geared toward partnerships, some of the frequent enterprise constructions throughout many sectors, together with enterprise, agriculture, power and actual property. 

The company has introduced it plans to make use of AI to determine potential compliance issues inside its Giant Partnership Compliance program within the following areas: partnership tax, common earnings tax, and accounting and worldwide tax. A number of industries will really feel the ache. 

This has many taxpayers concerned in partnerships nervous. One Chicago-based legislation agency, Baker McKenzie, even sued the IRS in March, demanding extra public disclosure about its plans to crack down on partnerships. So, it is going to be attention-grabbing to see how this performs out. 

Within the meantime, it is essential for these of us performing as their strategic tax advisors to assume proactively. Understanding the implications of amending partnership tax returns — and how you can use extensions to help your purchasers — is crucial on your observe.

Partnership tax legislation, already complicated, grew to become even trickier to navigate with the passing of the Bipartisan Funds Reconciliation Act in 2015. This act, changing the Tax Fairness and Fiscal Accountability Act of 1982, created a centralized partnership audit group inside the IRS to scrutinize partnership tax returns extra closely. 

The act additionally modified the protocols for amending beforehand filed returns. There are restricted exceptions, however most partnerships, together with many small ones, will probably be topic to the BBA guidelines. 

As a greatest observe, CPAs whose purchasers have partnership constructions ought to mechanically file extensions in order that revisions might be made if new info is introduced forth. Submitting for an extension permits the CPA and the shopper time to arrange the very best return and uncover all related info.

For instance, if new info is available in from a shopper in June and an extension has been filed, the CPA can simply alter within the unique return. Recognizing that many partnerships with a number of companions wish to file their returns early, the tax preparer might imagine that no extension is required. The profit to doing so is that with an extension request, a “superseding return” might be filed, even when a return was filed on the due date. The superseding return mechanically turns into the return of document — so long as an extension was filed.

If the return was filed with no extension request, the CPA should file an “Administrative Adjustment Request,” which introduces a number of complexities and potential pitfalls to amending a partnership return.

The AAR imposes quite a few processes in each calculating and attributing any further tax legal responsibility or discount to the filed return. Anybody who has finished an AAR is aware of very effectively that it’s much more complicated than submitting an amended, or superseding, return. Plus, any further taxable earnings is reported within the yr the AAR is filed, not within the unique yr it was earned. This could trigger some unintended tax penalties for the partnership and its companions. 

Most partnerships use the calendar yr as their tax yr, though different submitting years are permitted. The partnership tax return is due by the fifteenth day of the third month following the tip of the partnership’s tax yr. For many, that’s March 15. Type 7004 might be filed to acquire an computerized six-month extension. The extension paperwork should be filed by the unique deadline for the tax yr. 

Even for particular person returns, there isn’t a draw back to submitting for an extension, and there are lots of upsides. A greater tax return, with most deductions, might be filed when it is not rushed. Simply keep in mind that the extension is an extension of time to file, not an extension of time to pay. The tax legal responsibility must be estimated and paid by the unique deadline. 

Additionally, keep in mind that the failure-to-pay penalty is just 0.5% per 30 days, so some taxpayers will wish to file the extension with out paying their tax legal responsibility, successfully borrowing from the federal government for a couple of months. It is often greatest to incorporate the first-quarter estimate within the extension cost. That approach, if further tax was due for the prior yr, there isn’t a underpayment penalty for the prior yr, only a potential estimated cost penalty for the present yr.

Always remember to file the extension by the due date to keep away from the 5%-per-month failure to file penalty. One quirk is that if the taxpayer doesn’t file by the prolonged due date, the 5% per 30 days penalty goes all the way in which again to the unique due date.  

Use extensions to proactively assist your purchasers get the highest-quality tax technique — and return — as attainable.