TEFRA, also known as the Tax Equity and Fiscal Responsibility Act of 1982, is a United States federal law enacted to address various tax issues related to partnerships. The law established a comprehensive set of rules governing the taxation of partnerships and their partners, aiming to close certain loopholes and ensure fairness in tax treatment.
Under TEFRA, partnerships are treated as pass-through entities where income, deductions, and credits are allocated to individual partners rather than being taxed at the entity level. The Act provides guidelines for determining the taxable income of partnerships, the calculation of partner's distributive share, and the reporting and payment of taxes by partners.
TEFRA introduces the concept of the partnership level audit, where the Internal Revenue Service (IRS) can examine and adjust tax items at the partnership level rather than auditing each individual partner. Prior to TEFRA, audits were typically conducted at the partner level, making them time-consuming and inefficient. This change allowed the IRS to streamline the audit process, ensuring consistency and reducing administrative burdens.
Furthermore, TEFRA also includes provisions for electing large partnerships, which are allowed to avoid partnership-level audits by choosing to opt-out. However, this option necessitates that each partner's return be audited individually. This provision primarily applies to partnerships with more than 100 partners or those having partners that are themselves partnerships.
Overall, TEFRA provides a framework for the taxation of partnerships and aims to simplify and streamline the tax reporting process, while preventing tax evasion and ensuring transparency and equity in tax treatment.
