Business Partnerships & New IRS Audit Rules

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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We mentioned in a prior post how common pass-through businesses are in the United States. This is particularly true of partnerships. There are traditional partnerships, joint ventures, limited partnerships, limited liability partnerships and LLCs.

The manner for taxing and auditing of partnerships has significantly changed. These changes will require partnerships to update their agreements and work together when it comes to partnership requirements.

What is new?

The Bipartisan Budget Act of 2015 put in place some new audit rules. As this law did not go into effect until Jan. 1, 2018, many small business owners may be unaware of the changes.

In any case, the new rules specifically require the insertion of particular language into the agreements. It asks that partners replace the old phrase of “tax matters partner” with “partnership representative.” This means there must be an election of a general partner in the firm to become partnership representative in the event of an IRS audit.

Under the rules, the IRS may assess and collect taxes from the partnership in the audit process at the highest individual or corporate tax rate. This change is significant.

As pass-through entities, partnerships traditionally never paid taxes. This provided partnerships a significant tax advantage since a partner’s individual rate generally would be lower than the highest individual tax rate. Thus, a tax assessment under the new rules could amount to higher taxes for the partnership.

The new rules also prevent individual partners from participating in the audit. This includes preventing an individual partner from appealing an audit finding.

Additionally, there could be consequences for partners that earn income and leave the partnership prior to any assessment. These partners may still face obligations under such an assessment.

What possible options are available?

There are some complicated requirements pertaining to partners electing out of the new rules. This would require such an election on an annual basis. This matter will likely require additional guidance from the IRS. There are already a number of eligibility requirements for electing out as well.

Besides providing representation during an audit, tax attorneys can provide guidance regarding prevention of an audit to begin with. With the new partnership rules, it is already apparent how complicated the requirements are to begin with. Additionally, the tax penalties one may face due to a partnership can be severe.

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