Overview

Effective for tax year beginning January 1, 2018, all entities taxed as partnerships are now subject to new streamlined audit rules which drastically change the procedure for IRS audits.  Under previous law, audits generally were assessed and collected at the individual partner level.  For example, if the IRS audited Partnership ABC, they would have had to collect from Partner A, Partner B, and Partner C.  This created administrative difficulty for the IRS.  Under the new law, partnerships will generally be audited at the partnership level and any additional tax assessed will be owed by the partnership itself, not the individual partners.  This includes any amount of penalties or interest assessed by the IRS.  The new law has also changed the default year the assessment will occur from the year under audit to the year that the audit is completed.  This can be problematic if there are changes in the partners as someone can now be responsible for an assessment for a year in which they were not a partner.  Finally, the tax due is, by default, at the highest federal marginal rate for the year under audit.  Congress believes that this change to audit procedures will result in an over 10 billion dollar increase in tax revenue.  It is anticipated that the frequency of partnership audits will also increase.

Partnership Representative

The new law also replaces the concept of a Tax Matters Partner with a Partnership Representative.  Unlike a Tax Matters Partner, a Partnership Representative does not need to be a partner.  The Partnership Representative is granted broad powers, including the ability to bind the partnership and make final decisions for the partnership in audits.  If a partnership has not selected a Partnership Representative, the IRS has the authority to select one for the partnership.  The Partnership Representative is also empowered to elect out of the default rules and to “push-out” the effects of the audit to the individual partners.  For these reasons, it is important that each entity considers who will serve as its Partnership Representative and it is important the partnership agreement specifically addresses who the Partnership Representative will be, what powers he/she will have, what notices he/she must provide to the partners, what voting requirements exist for taking final tax positions with the IRS and how a successor can be chosen and a Partnership Representative can be replaced.

The Tax Law Section at Blakinger Thomas, PC will be watching closely any developments regarding the new partnership audit rules and other changes to the federal and state taxation laws.  We encourage all partnerships to engage an attorney with experience with the revised audit procedures to review their partnership agreements for compliance with the new requirements.

This article was written by Phillip J. Caramenico, an associate attorney at Blakinger Thomas practicing in the areas of Tax Law, Estate Planning and Business Law.  If you have any questions about this topic or other tax issues, please contact Phil at pjc@blakingerthomas.com or 717-509-7273.