by Harold F. Ingersoll, CPA/ABV/CFF, CVA, CM&AA
Partner at Atchley & Associates, LLP
Partnerships and many LLCs file partnership income tax returns. As a result of the Bipartisan Budget Act of 2015 (“BBA”), the IRS has new audit rules for entities that file partnership income tax returns beginning January 1, 2018. These audit rules significantly change the regime that currently governs partnership tax audits, assessments and collections.
The condensed version of the changes is, in the past when a partnership was audited, the IRS pushed the adjustments through to the partners of the partnership who were partners in the year under audit. The new rules allow the IRS to charge the tax, due to audit adjustments, directly to the partnership and the current partners.
Your first thought may be, why could this be a problem? Well, let’s assume you bought into a partnership in 2017, and shortly thereafter the partnership is audited by the IRS for 2015 and there is an adjustment that causes there to be more taxes paid. Under the new rules you would likely be paying the tax for the partners that were owners in 2015.
To solve this problem, you can make changes to your partnership or LLC member agreement. Partnerships with 100 or fewer partners that meet certain other requirements may be eligible to elect to opt out of these rules. For partnerships or LLCs that qualify for this “opt out”, the partnership agreements could be modified to make the “opt out” mandatory.
Another change with the BBA is the term of “Tax Matters Partner” is eliminated. The new term is “Partnership Representative”. The partnership or LLC agreement could be changed to reflect how the Partnership Representative will be selected, removed or replaced. You may also consider limiting the Partnership Representative’s authority over certain tax matters, such as extending a statute of limitations or settling the dispute.
There is also a new election labeled the “Push Out Election”. As it sounds this allows the partnership or LLC to push out any audit adjustments to prior year partners. This election is not automatic and must be elected within 45 days of receiving the final notice of partnership adjustment. The requirement to make this election can be documented in the partnership or LLC agreement.
The IRS has put us on notice that we can expect to see more partnership and LLC audits than in the past. Consulting your advisors about the issues raised in the BBA will leave you prepared for any audit in which your partnership may be involved.