Thinking of the IRS strikes fear in most of us, especially when “IRS” is used in conjunction with the word “audit.” This is especially true when IRS regulations change, requiring a fresh look at accounting and treatment of tax issues. One of the most recent vehicles for change is the IRS Enhanced Partnership Audit Rules. If you have business interests in a partnership or limited liability company, read on to learn how these new rules may affect you.
The Bipartisan Budget Act of 2015 (BBA) became law in 2015. The BBA, in Section 1101, set forth the new enhanced partnership audit rules.
Changes to Partnership Audits
The new audit regime becomes effective in calendar year 2018. Most partnership need to change operating agreements to comply with the new rules.
Partnerships with less than 100 partners or fewer specified types of partners may opt out of the new rules. However, there are restrictions on the types of partners permitted to do this: individuals, c corporations, s corporations, the estate of a deceased partner. Partnership that opt out will be held to the old pre-TEFRA rules.
Partnership with more than 100 partners are affected by the new audit regime. TEFRA tax managing partner will be replaced by a partnership representative, who will become the single point of contact between the IRS and the partnership. This entity will have the authority to bind the partnership, make elections, and select opt-outs. The partnership representative does not have to be a partner.
Under the new rules, it’s likely there will be more partnership audits. In the past, any adjustments to partnership tax items, including additional taxes and penalties, found during an audit were billed to the partners. Now, the partnership will be required to pay the tax underpayment to the IRS. Adjustment Year Partners will bear the burden of the tax payments, even if they were not partner during Reviewed Year.
What Do You Need to Do?
- Discuss the changes with your financial adviser, CPA, or attorney.
- Change partnership operating agreements to comply with new regulations.
- Decide whether opting out is the right way to go.
- Begin the process of choosing a partnership representative.
Find Out if You’re Ready for the New IRS Audit Rules.
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