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News & Publications >> Press & Media >> Final Audit Regs Put Focus on Debt Mischaracterization

Final Audit Regs Put Focus on Debt Mischaracterization

Kate Kraus in Tax Notes

Tax Notes (January 8, 2019) The mischaracterization of partnership debt on information returns issued to partners could create headaches down the road under the new audit regime. In the past, many tax return preparers didn’t worry about the numbers listed in the liability section of a partnership Schedule K-1, Kate Kraus of Allen Matkins Leck Gamble Mallory & Natsis LLP told Tax Notes. But under the final rules (T.D. 9844), released December 21, implementing the partnership audit regime, mischaracterizing debt as recourse versus nonrecourse could end up creating an entity level tax, Kraus said. Kraus said it is interesting how the IRS and Treasury decided in the December 21 rules to tax the full amount of a mischaracterized liability under the centralized partnership audit regime, even if the adjustment didn’t affect the amount of liability allocated to a partner.