As a member of an entity taxed as a partnership, we want to let you know about some VERY IMPORTANT changes to the Federal tax law related to IRS Audit Procedures that impacts every partnership.
Congress has enacted significant changes to partnership audit and adjustment rules. The changes are expected to dramatically increase the number of audits for partnerships. The change will require partners to carefully review and revise their partnership’s operating agreement.
The new partnership audit rules are generally effective for tax years beginning after December 31, 2017, but careful planning ahead of time will help diminish any unfavorable consequences.
Important new provisions that may impact you:
- Based upon the result of an IRS audit, the IRS may charge the highest individual tax rate on any additional tax, interest, and penalties. Payment would be due directly from the partnership rather than from the partners.
- Current partners could be responsible for tax liabilities of prior partners.
- New elections and opt-outs will be available to certain partnerships.
- Under the new regulations partnerships must designate a “partnership representative” replacing the prior “tax matters partner”. The partnership representative is critical; they will act as the single point of contact between the IRS and the partnership and will have full authority to bind the partnership and the partners during an audit. If a partnership does not designate a “partnership representative” the IRS may select one.
Potential opportunities to protect the partnership and its partners from these new changes:
- Opt-out Election for small partnerships:
- A small partnership is a partnership with 100 or fewer partners and has only partners that are individuals, C corporations, S corporations, foreign entities treated as corporations, or estates or trusts of deceased partners.
- This leaves out partnerships that have other partnerships as partners.
- To opt-out, the partnership may make an annual “opt-out” election with their timely filed tax return (Form 1065) including extensions.
- Push-out Election:
- This election allows a partnership who has not made the annual opt-out election for the year to elect to push-out (or transfer) the liability for underpayments to those partners who were partners in the year being audited.
Your operating agreement should be revised to address these new provisions including the manner of electing and removing the partnership representative. We recommend contacting your attorney to amend your partnership agreement as necessary.
We are available to help you determine if these elections apply to you and if they would be beneficial to your situation and to explore other planning opportunities.