Recently enacted changes to the way partnerships are audited by the IRS and how any resulting tax liability is computed and collected could require partners to revise their operating agreements. Whether your partnership is made up of two or 200 people, read on to find out what the new rules entail and how you can comply – or opt out.
The IRS will now assess and collect tax during an audit at the partnership level, not the partner level. This may be bad news for partnerships who could face a higher tax liability because the partnership would have to pay taxes at the highest individual or corporate tax rate.
Moreover, under the new rules, partnerships are now required to designate a “partnership representative” who has the sole authority to act on behalf of the partnership for the audit. The representative does not have to be a partner, but he or she must have a substantial presence in the United States and meet other requirements as outlined in IRC Section 6223.
The new partnership audit rules (IRC Section 6221) represent the most substantial change to partnership tax audits in more than 35 years. The rules that went into effect January 1, 2018, were part of the Bipartisan Budget Act of 2015, and superseded the partnership audit rules in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).
Eligible partnerships may elect out of the new partnership audit rules; however, they may still need to update partnership agreements and modify the tax audit provisions of future agreements to address the new rules.
To learn more about the partnership audit rules and the potential impact on your business, check out this FAQ from our Praxity partner DHG or speak with your Kaufman Rossin tax adviser.