The BBA rules are coming
IS YOUR OIL AND GAS PARTNERSHIP READY?
LARRY A. CAMPAGNA AND JESSICA N. CORY, CHAMBERLAIN, HRDLICKA, WHITE, WILLIAMS & AUGHTRY, HOUSTON
THE UPCOMING New Year may present some nasty surprises
to oil and gas partnerships that have not prepared for the
new partnership tax audit rules. Entirely new Internal Revenue Service (IRS) audit procedures will become effective
for partnership taxable years beginning after Dec. 31, 2017.
These new rules drastically change the way the IRS will assess
additional tax on partnership income. Moreover, the new
regime will make partnerships directly liable to pay any
additional taxes, not the individual partners.
The new partnership audit rules were enacted as part of
the Bipartisan Budget Act of 2015 (BBA). The BBA adopted
a streamlined set of rules designed to make it easier for the
IRS to audit and collect tax from large partnerships, partic-
ularly hedge funds, private equity firms, and oil and gas
partnerships. To accomplish these goals, the BBA authorizes
the IRS for the first time to assess and collect tax adjustments
at the partnership level, effectively imposing taxes directly
on entities taxed as partnerships. In effect, partnerships will
no longer be taxed entirely as pass-through entities.
Congress expects to raise $11 billion in revenue as a result
of these rules, so oil and gas partnerships should expect the
IRS to be aggressive in using its new tools. Fortunately, there
are actions tax partnerships can take now to reduce the
potential for negative consequences in the coming years.
OIL AND GAS PARTNERSHIPS
The term “partnership” is broader than most folks expect.
The Internal Revenue Code (IRC) defines “partnership” ex-