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Partnership Tax/TEFRA

TEFRA Partnerships

Ordinarily partnerships follow TEFRA procedures for income tax purposes unless they fall within the small partnership exception.  TEFRA, which stands for the Tax Equity and Fiscal Responsibility Act of 1982, establishes the examination, processing and judicial requirements governing the tax treatment of entities qualifying as TEFRA partnerships.  The TEFRA unified audit and litigation procedures set forth in Internal Revenue Code sections 6221 through 6234 are commonly referred to as the TEFRA partnership procedures.

Prior to the enactment of TEFRA, no unified proceedings existed for examining partnerships at the entity level, which meant when the federal government launched an investigation of a partnership, the IRS had to examine the personal tax returns of each partner in the partnership.  TEFRA streamlined this burdensome examination process by requiring investigations to be handled through single, partnership level proceedings, rather than multiple, individual partner-level proceedings.  

In general, because partnerships are not treated as a separate entity for tax purposes, they do not pay income tax to the federal government.  Rather, each partner must report the partnership’s earnings on their individual income tax forms.  Additionally, under TEFRA, the partnership is required to file a joint tax form setting forth the income of every member of the partnership. Where the IRS discovers a tax deficiency or refund during the audit process, the deficiency or refund will be applied to each partner’s income tax return.

Under TEFRA rules the IRS will first audit a partnership at the entity level to determine whether the partnership properly reported its earnings and losses.  Where the IRS finds that the income or losses were not properly treated and reported, the partner who has been appointed to serve as the Tax Matters Partner (TMP) will be responsible for deciding whether to appeal the IRS’ determination.  The TMP also has many other duties, including selecting litigation venues, receiving notices from the IRS, keeping the partners informed and submitting information to the IRS about the partnership’s partners.

TEFRA Small Partnership Exception

While almost all partnerships are required to comply with TEFRA rules, certain partnerships with 10 or fewer partners throughout the tax year may qualify for the “small partnership exception.”  In addition to having 10 or fewer partners, these partnerships must satisfy a number of different criteria under the small partnership exception test.  Additionally, a small partnership may elect to follow the TEFRA rules by filing Form 8893 (Election for Partnership Level Tax Treatment) or attaching  an election statement with the partnership’s tax return in the first year it wants to be subject to TEFRA requirements.

Contact a Virginia Business Tax Lawyer

The TEFRA rules and procedures can be very challenging to comprehend.  If you have questions about TEFRA or the other laws tax laws governing partnerships you should contact an attorney at Thorn Law Group.  We are an experienced tax law firm representing individuals, partnerships, corporations and other entities throughout Virginia, across the country and around the world.  Contact our Virginia offices today by calling 703-752-3752 or emailing Kevin E. Thorn, Managing Partner of Thorn Law Group at ket@thornlawgroup.com.


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