The IRS has passed new regulations for auditing partnership tax returns filed for tax years beginning after December 31, 2017. Under the new audit regime, the IRS will audit the partnership and its partners and assess all taxes and penalties resulting from their findings at the partnership level. Small partnerships with 100 or fewer partners who are all individuals, corporations (S or C) or an estate of a deceased partner may elect out of the new audit regime. Partnerships with disregarded entities such as single member LLCs or Trusts are not eligible to elect out of the program. The election to opt out must be filed on a timely filed tax return.
Under the new regime, a new term has emerged – The partnership representative. This is someone who is designated on the tax return that is authorized to act on behalf of the partnership before the IRS. If this person is not designated on the tax return, the IRS may choose who the representative is. This representative has the sole power to act on behalf of the partnership and all partners will be bound by the decisions this individual makes.
Who can be the partnership representative?
Any person or entity can be designated as the partnership representative as long as they have a substantial presence in the United States and if an entity is designated, an individual must also be identified, including their address and taxpayer ID number.
Why does this matter?
Under the new audit regime, the partnership representative has the authority to elect to push the changes assessed to the individual partners and he/she can choose which partners will take the assessment. There is also an increased interest rate for making this election. Once this election has been made, the partners are bound by it.
What can you do to protect yourself?
We recommend that you amend your operating agreement to designate your partnership representative and include language to limit this person’s powers. Other items to consider when amending your operating agreement:
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- When is the representative required to notify the other partners in the partnership
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- When do the other partners get to review the documents sent to the IRS
- The review process for the IRS proposed adjustments
- How to allocate the adjustments proposed by the IRS (Do you push these out to your partners or pay the tax at the partnership level?)
By Margaret Flowers, CPA, Partner – Harris CPAs
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