International Partnerships and the IRS Audit Process

International partnerships with offices in Boston need to prioritize federal tax compliance. Falling at the nexus of two of the IRS' top enforcement priorities—partnership tax and international tax—international partnerships (and their partners) can face substantial risks if they are not prepared to demonstrate strict compliance with the Internal Revenue Code, Bank Secrecy Act and other relevant federal laws during an IRS audit.

An Overview of the IRS’ Audit Process for International Partnerships

Preparing for an IRS audit starts with understanding what to expect during the audit process. Here is an overview of the major steps during an international partnership tax audit under the IRS’ BBA Centralized Partnership Audit Regime:

1. Initial Notices

The IRS informs an international partnership that it has been selected for an audit by issuing a Notice of Selection for Examination (Letter 2205-D). Approximately 30 days after sending this initial notice, it will send a Notice of Administrative Proceeding (Letters 5893 and 5893-A) to inform the partnership that the audit is formally underway. Between the issuance of these two notices, the partnership will need to contact the IRS to schedule an initial examination appointment, and its managing partners should work closely with outside counsel to formulate an audit response strategy.

2. Summary Report and Appeal

After conducting a preliminary examination, the IRS will issue a summary report. If the partnership disagrees with the findings in the summary report, it has the right to file an appeal. At this stage, appeals are handled by the IRS’ Independent Office of Appeals.

3. Notice of Proposed Partnership Adjustments (NOPPA)

Following the appeal (if any), the IRS will issue a Notice of Proposed Partnership Adjustments. This notice will state the IRS’ findings and the reasoning behind any imputed underpayments that remain in place.

4. Request for Modification of Imputed Underpayment and Appeal

If the partnership disagrees with the IRS’ imputed underpayments after receiving a NOPPA, it can file a request for modification. The partnership has 270 days from the issuance of the NOPPA to make this request unless otherwise agreed with the IRS. Requests for modification are handled by the IRS’ BBA Operations division. If a partnership disagrees with BBA Operations’ decision, it can then file a second appeal with the Independent Office of Appeals.

5. Notice of Final Partnership Adjustments and Next Steps

Once a partnership has exhausted all administrative appeals, the IRS will issue a Notice of Final Partnership Adjustments. At this stage, if the partnership still disagrees with the IRS’ calculation of its tax liability, it will take its tax controversy to federal court.

Contact International Partnership Tax Lawyer Kevin E. Thorn in Boston

Kevin E. Thorn, Managing Partner of Thorn Law Group, represents international partnerships in Boston in IRS audits and other federal tax controversies. If you have received a Notice of Selection for Examination (Letter 2205-D) from the IRS, we invite you to call 617-692-2989 or tell us how we can reach you online to arrange a confidential initial consultation.