New Partnership Audit Rules and Roles
November 16th, 2018 by JBWK
Submitted by Attorney Rebecca S. Aman
Beginning with the 2018 tax year, the IRS will be implementing new partnership audit rules. Although the new audit regime was enacted with the Bipartisan Budget Act of 2015, the rules are just now going into effect. Limited liability companies (“LLC”s) that are taxed as partnerships likewise will be impacted by these new rules.
Under the new default rules, if a partnership is audited and the IRS deems that taxes were underpaid, the underpayment amount is imputed to the partnership (not the partners) and the partnership pays the underpayment. Conversely, some partnerships can elect to “push out” such adjustments, in which case the partners would be responsible for such repayment. Whether your partnership or LLC can or should elect out of the default rules is a fact-specific question and beyond the scope of this article. We encourage you to discuss the availability and/or advisability of this option with your tax advisor or accountant.
More importantly, the new rules provide that a Partnership Representative must be appointed to represent the partnership with respect to IRS matters. Prior to 2018, partnerships often appointed a Tax Matters Partner, which was a similar position. The Partnership Representative conceptually replaces the Tax Matters Partner. Unlike a Tax Matters Partner, however, the Partnership Representative need not be a partner or member of an LLC. The Partnership Representative can be a manager or any other appointed individual. If a Partnership Representative is not appointed by the partnership or LLC, the IRS can appoint one for you. The person appointed by the IRS need not have any connection with the partnership or LLC. Therefore, it is strongly recommended that each partnership or LLC appoint a Partnership Representative on its 2018 partnership return (due to be filed on March 15, 2019).
Given the breadth of a Partnership Representative’s authority with respect to the IRS, it also may be desirable to place some parameters around your Partnership Representative by revising your partnership or operating agreement. Some provisions that you may wish to consider include: establishing how a Partnership Representative may be selected, requiring the Partnership Representative to keep the partners informed about an audit, and/or to requiring partner votes on certain decisions, such as settlements or appeals.
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