The Bipartisan Budget Act of 2015 (the “BBA”) has been on the books for three years, but new rules for partnership audits and adjustments only recently became effective for the 2018 tax filing year. The tax attorneys at Rosenberg Martin & Greenberg LLP in Baltimore are now advising partnerships and limited liability companies to review their current partnership and LLC agreements to verify that they will not see any adverse consequences from the new rules.
Critical Changes in the New Partnership Rules
Congress adopted the new rules to streamline audits of partnership returns. The effect of that streamlining is to shift much of the tax burden from individual partners to the level of the partnership.
This shift leads to certain consequences:
- Any taxes, interest, and penalties will be paid from the partnership entity, potentially at the highest marginal tax rate.
- Tax liabilities of former partners will be paid by the current partnership and will come out of the existing partners’ draws.
- Partnerships and LLCs now need to designate a “partnership representative” in place of the old “tax matters partner”. The partnership representative must have a substantial presence in the United States, and will have broad authority to bind the partnership and to be the sole contact person for communications with the IRS. If a partnership or LLC fails to designate a representative, the IRS can select any person with a substantial presence in the U.S. as the representative.
Partners will generally not be allowed to adopt tax positions that are in conflict with the partnership’s return. In view of this, large partnerships and LLCs must verify that all of their partners and members are fully in agreement with the partnership’s tax filings.
Opting Out of the New Rules
Smaller partnerships and LLCs can elect to be audited under the individual audit rules. This option is available if specific conditions are met:
- The partnership elects out of the new streamlined rules for the entire tax year;
- The partnership issues fewer than 100 K-1s to its partners or member;
- The partners or members are all individuals, C corporations or foreign entities that would be deemed to be C corporations under U.S. laws, S corporations, or deceased members’ estates;
- The election must be made with the partnership’s tax return that is filed on time and with proper disclosures, and the partners or members must all receive notice of the election.
Contact the Baltimore Tax Lawyers at Rosenberg Martin Greenberg
The tax attorneys at Baltimore’s Rosenberg Martin & Greenberg LLP have closely followed the drafting and implementation of the new BBA rules on streamlined partnership audits. The new rules are designed to make it easier for the IRS to audit larger partnerships, rather than to improve the fairness of the audits to the partnerships. We are advising our clients to review their partnership and LLC agreements and either to amend those agreements to avoid adverse partnership audit consequences, or to opt out of the new audit rules if that option is available and opting out will provide strategic benefits.
Please contact us for answers to your specific questions about the new partnership audit rules, or to schedule an appointment with one of our tax attorneys.
- www.aicpa.org: Partnership Audit and Adjustment Rules. https://www.aicpa.org/interestareas/tax/resources/representation/partnership-audit-and-adjustment-rules.html
- www.natlawreview.com: IRS Issues Final Regulations on Partnership Audit Rules. https://www.natlawreview.com/article/irs-issues-final-regulations-partnership-audit-rules