Congress recently enacted significant changes to partnership audit and adjustment rules. The changes are expected to dramatically increase the audit rates for partnerships and will require partners to carefully review, if not revise, their partnership’s operating agreement.

The new rules generally apply to partnership returns with taxable year ends beginning after January 1, 2018 and careful planning today can mitigate many of the unfavorable consequences of non-compliance.

Impact of the New Rules

  • The IRS may collect any additional tax, interest, and penalty directly from the partnership rather than from the partners (the tax could be collected at the highest individual tax rate).
  • Current partners could be held responsible for tax liabilities of prior partners unless addressed in the Partnership/Membership agreement.
  • New elections and opt-outs will be available and your partnership/membership agreement may need to be revised to specify who makes these decisions.
  • In particular, regarding the ability to opt-out of these new rules – entities taxed as partnerships with certain Trust, Disregarded Entities, and tiered-Partnerships as partners – will not be permitted to opt-out. A review of the overall structure of the ownership of these types of entities will be required.

Perhaps one of the most significant changes, is that there are many new tax terms and concepts that will require you to adjust your partnership’s operating agreement. In particular, the new term “partnership representative” replaces the prior term “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. Although the IRS is quite clear that they will only speak to the partnership representative, it is up to the partnership/membership agreement to impose fiduciary responsibilities on the individuals serving in this capacity.

How MBAF Can Help

It is safe to say that virtually all entities filing a partnership tax return need to address these new rules in the form of changes to the respective agreements and review of their organizational structure with their partners. Our offices can help you determine if this would be beneficial to your situation and explore other planning opportunities.

Understanding and compliance with the new IRS partnership audit procedures, can be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax specialists, or call us at 1-800-239-1474.