Budget Act and How It Affects Tax Compliance

The new Bipartisan Budget Act of 2015, signed into law by President Obama in November, makes some far-reaching changes to partnership audits along with repealing automatic enrollment in health plans under the Affordable Care Act (ACA). The new law is a good preview of how Congress is looking to enhanced tax compliance as a revenue raiser. The tax compliance measures in the budget law, largely targeted to partnerships, are projected to generate more than $10 billion in revenue over 10 years.

TEFRA repeal

More than 30 years ago, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The law was intended to help the IRS better audit partnerships. For many years, TEFRA worked as intended. However, as partnerships have grown in number and complexity since passage of TEFRA, the IRS has been challenged to keep up with the changes. Today, it is not uncommon for partnerships subject to TEFRA to have hundreds or even thousands of partners.

The TEFRA rules generally applied to partnerships with more than 10 partners. Partnerships with 10 or fewer partners are audited as part of each partner’s individual audit. Additionally, partnerships with 100 or more partners that elect to be treated as Electing Large Partnerships (ELPs) are subject to a unified audit under which any adjustments are reflected on the partners’ current year return rather than on an amended prior-year return.

The Budget Act repeals the TEFRA and ELP rules (with a delayed effective date, discussed below). The Budget Act replaces TEFRA with a streamlined structure for auditing partnerships and their partners at the partnership level.

As mentioned above, the TEFRA repeal is not officially effective immediately. Rather, the changes made by the 2015 Budget Act apply to returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new rules in the Budget Act to any partnership tax year beginning after the date of enactment, which is November 2, 2015.

According to the Joint Committee on Taxation (JCT), repeal of TEFRA will generate more than $9 billion in revenue over 10 years. Revenue is expected to be raised through enhanced audits of partnerships. The partnership universe is very large. For 2012, partnerships passed through $1,400.8 billion in total income minus total deductions available for allocation to their partners.

The Budget Act also clarifies that Congress did not intend for the family partnership rules to provide an alternative test for whether a person is a partner in a partnership. The determination of whether the owner of a capital interest is a partner should be made under the generally applicable rules defining a partnership and a partner. Further, the 2015 Budget Act clarifies that a person is treated as a partner in a partnership in which capital is a material income-producing factor whether the interest was obtained by purchase or gift and regardless of whether the interest was acquired from a family member. According to the JCT, this provision is projected to raise more than $1 billion over 10 years, again through enhanced compliance.

Affordable Care Act

One of the goals of the ACA was to expand enrollment in health insurance plans. For employers with more than 200 full-time employees, the ACA required them to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any authorized waiting period), and to continue the enrollment of current employees in a health benefits plan offered through the employer. The ACA was passed in 2010 but the IRS has not issued any regulations. In fact, the IRS announced in 2012 that it was holding off on the issuance of regulations.

The 2015 Budget Act repeals the ACA’s requirement for automatic enrollment in health insurance plans. In this case, repeal is effective as of the date of enactment of the new law: November 2, 2015.

Pension plans

The Budget Act also impacts defined benefit (DB) pension plans. These are traditional pension plans maintained by employers. Current law requires DB plans to make a contribution for each plan year to fund plan benefits. The Budget Act extends funding stabilization rules for DB plans through 2019. The Budget Act also gives DB plans some flexibility in their use of mortality tables. Additionally, the Budget Act increases premiums paid by pension plans to the Pension Benefit Guaranty Corporation (PBGC).

If you have any questions about repeal of TEFRA or any of the provisions in the Budget Act, please contact our office.