States Lag in Adopting Federal Partnership Tax Audit System (1)

Nearly half the states have yet to adopt the newest federal partnership audit system, hindering their potential for revenue as federal audits accelerate, tax practitioners said.

The IRS’s partnership audit regime, established in the Bipartisan Budget Act of 2015 and in effect since 2018, introduced a centralized process aimed at streamlining audits of large, complex partnerships, including private equity firms and hedge funds. Under this system, the agency can assess and collect taxes at the partnership level rather than at the individual partner level, unless the partnership elects to have partners compute and pay the tax.

But 23 states ...