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Partnership Audit Changes – elections may be required

Partnership Audit Changes – elections may be required

Partnership Audit Changes – elections may be required

Buried among the numerous changes that were made to the federal income tax rules in 2018, was a small, but impactful change in the way partnerships (including LLC-partnerships) are treated in the event of a federal income tax audit.

Audit Approach

By default, the Internal Revenue Service (IRS) will now audit partnership returns filed after 12/31/2017 as a single entity, rather than via the individual partners. In the event of an audit adjustment, the IRS will make an assessment to the partnership at the highest individual income tax rate, which is currently 37%.

  • For certain partnerships, including those with fewer than 100 partners, you may make an election on your 2018 income tax return to avoid this treatment. Our firm will be recommending this election for most eligible partnerships.
  • For other partnerships, including those with 100 or more partners or those having a disqualified type of partner (another partnership or a trust, for example) the election is not available.

Partner Roles

The act also requires partnerships to designate a partner (or other person) with a substantial presence in the U.S. as the partnership representative who will have the sole authority to act on behalf of the partnership for purposes of partnership-level audits.

Where no designation is in effect, the IRS is given the authority to select any person.

This representative, who replaces the former “Tax Matters Partner”, has broad powers including the ability to bind the partnership to agreements made with the IRS in the event of an audit.

Action Needed

Based on these changes, we encourage you to:

  1. Review your current partnership or LLC Operating Agreements
  2. Talk with all of your business partners/members and consult with your attorney to consider appropriate modifications to your Operating Agreement, including designation of a “Partnership Representative”.

In any case, consult with your tax advisor to determine the impact on your partnership and authorize them to make any required elections and to designate your Partnership Representative.