New I.R.S. Policies And Their Effects On P.T.Ps
The Internal Revenue Service (IRS), has recently introduced new policies that will greatly affect PTPs and their foreign associations. This was after The IRS enforcement, received a 10-year funding increment worth 80 billion dollars to support its ongoing large, complex partnerships examination initiatives.
Previously, the Internal Revenue Code’s section 7704 of 1987 was the primary law on Publicly Traded Partnerships (P.T.Ps). Under this section’s regulations and guidelines, P.T.Ps, from both tiers enjoyed numerous benefits once they complied with related I.R.C regulations and defining sections. These outline qualifying incomes for pass-through taxation methods and exemption from entity-level tax.
The new IRC policies introduced by IRS will see partnerships audited more closely and comprehensively. These policies will see large, complex partnerships with the highest chances for noncompliance with IRS get audited first. They have also touched majorly on foreign investors who enjoyed a bit of tax leniency previously. The foreign PTP investors will now be required to have the necessary documentation as their partnerships will supplement their information as well as pay withholding taxes.
In this article we shall look at the effects these policies will have on PTP trading by foreigners.
New IRS Policies
For over ten years, efforts have been underway to beef-up enforcement against large, complex partnerships. Based on the large corporation’s compliance program, the IRS has launched the Large Partnership Compliance Program (LPCP) to help in general but comprehensive audits of large partnerships. LPCP is expected to pick the partnerships to be audited, based on data analytics meant to identify those with a high noncompliance risk.
Partners in any partnership have the option to take control of their tax collection by ensuring taxes are paid or have the IRS take the legal step of directly collecting from the partnership.
The IRA’s fund for tax enforcement support will also help The IRS in its plans to train and organize analytical teams equipped with the know-how to audit large partnership structures and examine issues on self-employment tax exemption for limited partners and no filing of foreign entities and other related matters.
The IRS has also introduced forms K-2 and K-3 to help in the collection of necessary data such as the partnership’s domestic and foreign activities, calculations by partnerships on partners’ tax basis, disclosure of partners’ share(s) on sale, that provide taxable income and other information collection improvements on partnership tax returns. This information will be provided primarily by the partnerships in the newly introduced forms.
The IRS has strict compliance campaigns and priority plans underway. These are expected to help with information gathering on issues such as:
- Transactions in partnership interests. These transactions are carried out by partners on distributions and deductions of losses in excess of partner basis, and sales of interest. This will ensure the IRS gets information on any partnership gains that are not reported.
- Examination of self-employment tax exemption for limited partners’ distributed shares on the involved partnership income.
- The reporting and withholding obligations of partnerships as set by the Foreign Account Tax Compliance Act (FATCA) should be met by all relative partnerships and their involved foreign entities.
A PTP must pay the expected withholding tax on distributions, awarded to foreign partners, which are within the taxable income threshold. The IRS has made this easier on itself by the introduction of form 1042 (annual withholding tax return for U.S source income of foreign persons) and forms 1042-S (foreign persons U.S source income subject to withholding tax)
Several IRS compliance campaigns are focused on inbound investment, mostly made via pass-through entities. Examples include:
- The Adequacy of Foreign Investment in Real Property Tax Act (FIRPTA) reports on gains and other incomes from US real estate investments.
- Compliance with the newly introduced form 1120-f and correct data filing by the partnership and or on partners involved.
- Compliance with the filing of the new forms 1042 and 1042-S which will work to complement the Schedule K-1 for the yearly information on gains, income, losses, etc.
- Foreign investors, before investing, will be required to apply for nonresident alien treaty exemptions which will require the satisfaction of documentation and substantiation rules.
The IRS continues to enforce its campaigns and priority plans to ensure comprehensive audits are carried out on partnerships even listing in its 2022-23 priority guidance plan, developing guidance on abusive use of partnerships for inappropriate basis adjustment.
Any foreigner with intentions to invest in PTPs in the U.S. would be well advised to ensure they are well equipped with any knowledge of the new policies that may affect them in their endeavor. It is also necessary to do proper research on any PTP before investing.