December 21, 2017
Cohen Seglias Author Marian A. Kornilowicz
On January 1, 2018, the rules and procedures relating to IRS audits of partnerships, including those limited liability companies taxed as partnerships, (for purposes here, collectively, the “Partnerships”) will change. The Bipartisan Budget Act of 2015 (“BBA”)(26 U.S.C.A. §§6221-6241), which was signed by President Obama on November 2, 2015, is generally intended to make it easier for the IRS to audit Partnerships and to assess and collect underpayments of taxes. It allows the IRS to assess and collect taxes directly from the Partnerships rather than from the partners or members (for purposes here, collectively, the “Partners”) as was the case under the old rules. (Apparently, the IRS’s collection efforts directed against the Partners were unsatisfactory.) This change is significant – it not only assesses the Partnership for the underpayment of taxes by the Partners, but it also shifts from the IRS to the Partnerships themselves the task of collecting those taxes from the Partners who benefitted from the underpayment. It also introduces complications, e.g., when there are changes in the Partners from the audited year in the past (the "reviewed year") to the year in which the Partnership is assessed and has to pay the taxes (the "adjustment year"). At that point, the Partners in the adjustment year suffer the consequences by having to pay the tax and not the former Partners who directly benefitted from the underpayment in the reviewed year.
In order to simplify or streamline audits, the IRS is not obligated under the BBA to give notice of an audit to any of the Partners and the individual Partners are not permitted to participate in the audit or challenge the results. Instead, the BBA requires that each Partnership designate a ‘partnership representative’ (a “PR”) who does not need to be a Partner but has the sole authority to act on behalf of the Partnership and to bind the Partnership and its Partners. This designation must be made annually on the Partnership’s tax return and, if it is not made, the IRS may select a person to serve as the PR. The PR replaces the ‘tax matters partner’ under the old rules but without the attendant protections for Partners.
Many of the changes and ramifications created by the BBA and issues relating to any audits need to be addressed by a Partnership’s accountants. Examples include whether or not to opt out of the new rules, which is permitted assuming the Partnership qualifies. Other issues, however, should be reviewed and addressed by a Partnership’s legal counsel, and revisions will likely need to be made to the partnership or the operating agreement (the “Agreement”) of Partnerships formed prior to January 1, 2018.
Among the issues that counsel will need to address in the revisions to the Agreement include:
We strongly recommend that each Partnership contact its counsel and discuss the BBA and the changes that should be considered for its Agreement. For more information, please contact the Firm’s Business Transactions Group.
|Marian A. Kornilowicz, Chair||Robert K. Beste, Jr.|
|Lonny Cades||James F. Harker|
|Cheryl A. Santaniello|