Posted by ABLE Tax Resolution

What Is the New Partnership Audit Rules

What Is the New Partnership Audit Rules

A provision has been included in the Bipartisan Budget Act of 2015 (BBA) which resulted in the creation of audit rules on new partnerships. Recognizing partnerships including LLCs being subject to these new rules are necessary. The rules will be implemented beginning on or after January 1, 2018. There’s only one simple reason why Congress passed the new rules. It’s because they want to make it faster for the IRS to complete its job as it allows more entities to be audited.

In the past, they have the old tax matters partner but under the new rules, it has been superseded with the “taxpayer representative”. Anyone who is or not part of the partnership can be appointed as a taxpayer representative. This person has a very significant part because he will be the one to participate in the partnership audit and any judicial proceedings on behalf of the partnership. Partners are not permitted to join in the audit. They will not receive any notifications while the partnership is in the process of being audited and couldn't attend to in the partnership’s defense. The taxpayer representative has the sole authority to communicate with the IRS for anything related to the audit and elections that will be applied. The elections will be discussed briefly below.

With the high level of importance of a taxpayer representative, Partnership agreements, this includes LLCs who are taxed as a partnership are advised to declare who will be their taxpayer representative, how they can be eliminated or terminated and how a new taxpayer representative will be selected.

Furthermore, there is a chance of being charged a higher tax rate under the new rules for audits of partnerships. Along the process, the IRS may discover and declare changes in respect to their assessment at the partnership level and take note that it will be derived in the year when the audit or judicial review is obtained. This means that the partnership will be liable to be paying tax base on the highest individual or corporate tax rate. This is somewhat a burden to the present partners with fiduciary obligation because they are obliged to pay even though they are not present as partners at that time.

Below is a list of exceptions you can opt to elect in order for the above not to occur.

  • Small partnerships: This is comprised of two criteria. First, the partnership must have at least 100 or fewer partners. Second, the partners should only be:
  • Individuals 
  • Estates
  • C corporations 
  • S corporations 
  • A Foreign entity that should be regarded as a C corporation if it were a domestic entity.

This means that neither a partnership, a trust that includes grant trust, nor a single-member LLC will be eligible for an exception. It is required for the partnership to submit a timely filed return with the list of detailed information of all the partners. It is advisable to specify in the agreement if the qualifying partnership is going to have this election.

  • Push-out election: You can push-out the new audit rules to the previous partners and you have to remember that it is not the IRS but the partnership, who can send the amended K-1s to them. If you wish to elect this election, upon receiving the date of notice of a partnership adjustment, then you have 45 days for filing this election. To avoid future complications from the taxpayer representative, we strongly advice that you update the partnership agreement right away if elect out is desired.
  • Rate adjustment: it was stated that the IRS is allowed to assess and declare changes that might add your tax rate in reference to the highest individual or corporate rate and so, the taxpayer representative will intervene and bargain or propose with the IRS to lower the tax rate.

This is only an overview of the new partnership audit rules. If you are concerned about how will it affect you, maybe you want to know the things you can do if you will be audited or you want to learn of the appropriate modifications for your existing partnership agreement, then it is best to contact the proper department. It might be a little confusing for now but for any queries or clarification you have, just get in touch with a tax professional.

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