Starting January 1, 2018, new IRS regulations will significantly change the treatment of partnerships and limited liability companies (LLCs) during audits. We recommend that all partnerships and LLCs amend their partnership agreements or operating agreements, respectively, to address the new regulations. The regulations are specifically directed to partnerships, but because the IRS typically treats LLCs as partnerships, they also affect LLCs.
The regulations were issued this summer to implement provisions of the Bipartisan Budget Act of 2015. Currently, during audits of partnership tax returns, the IRS is required to pursue partners on an individual basis. However, under the new regulations, the IRS can deal directly with the partnership itself, and the partners at the time of the audit will be responsible for correcting any deemed underpayment, regardless of whether they were partners during the year being audited. This system makes the audit process less complicated and less expensive for the IRS, but creates situations where current partners may be liable for amounts that would more appropriately be liabilities of former partners.
Small partnerships may opt out of the new rules and remain subject to the current audit rules. Additionally, partnerships may elect to “push out” responsibility for underpayments to persons who were partners during the year being audited, rather than the current partners. In most cases, it will be to the partnership’s advantage to make one, or both, of these elections. We recommend that every partnership and LLC amend their governing documents to address these scenarios.
The new regulations also make changes with respect to the “partnership representative” (formerly referred to as the “tax matters partner”). We recommend revising partnership agreements and operating agreements to address the new duties and powers of the partnership representative and to ensure that the appropriate person is selected as partnership representative.
The attorneys at Ireland Stapleton can advise you regarding the new regulations and despite the complexity of the regulations, make this process simple for you. Contact your Ireland Stapleton attorney for more information.
Eric R. Benson is a business law attorney with Ireland Stapleton Pryor & Pascoe, PC. His practice focuses on advising businesses on legal matters throughout the life cycle of the business. He also advises nonprofit organizations regarding formation, qualification for tax exempt status, mergers and acquisitions, and general matters related to their operations. Contact Eric at ebenson@irelandstapleton.com or 303-628-3615.