Partnership Audit Rules
The Bipartisan Budget Act of 2015 (the “Act”) sets forth new partnership audit rules that became effective for most partnerships (and limited liability companies taxed as partnerships) on January 1, 2018. The key components of these rules are as follows:
- The IRS can determine audit adjustments at the partnership, rather than the partner, level.
- Each partnership must designate a “partnership representative” who will be the partnership’s sole representative in connection with an audit or other procedures.
- The partnership is responsible for any underpayment even if the partners have changed.
A partnership meeting certain criteria can opt out of the new rules on a year-by-year basis. Additionally, under the new rules, the partnership may make an election to shift the underpayment burden to the partners instead of the partnership. However, this election must be made within 45 days after receipt of the final partnership adjustments of a reviewed year.
Partnerships should consider amending governing documents and strengthening contractual provisions related to the partnership representative; for example, the partnership may want a provision in the operating agreement to require the partnership representative to: (i) provide information and/or notices relating to federal income tax audits or judicial procedures and/or (ii) obtain consent from the partners before acting in any way that may bind the partnership.
If you have any questions related to this topic and how it may affect you and your business, our Corporate Department may be able to help. To reach one of our Corporate attorneys please call our office at 617-951-3100.
Disclaimer: This article has been prepared for informational purposes only. This article is not intended to provide tax or legal advice and we urge you to consult with your tax advisors regarding the application of the Act to your particular situation.