New IRS Audit Rules – Partnerships
New partnership IRS audit rules, effective for audits of partnership tax years beginning on or after January 1, 2018, are a substantial departure from the prior partnership audit rules. The changes are expected to dramatically increase the audit rates for partnerships and will require partners to carefully review, if not revise, their partnership’s operating agreement.
The new rules generally apply to partnership returns filed after 2018, but careful planning today will help mitigate any unfavorable consequence. The IRS may collect any additional tax, interest, and penalty directly from the partnership rather than from the partners (the tax could be collected at the highest individual tax rate).
Particularly, the new term “partnership representative” replaces the prior “tax matters partner.” The partnership representative is critical. They will act at the single point of contact between the IRS and the partnership, and will have full authority to bind the partnership and the partners during an audit. A partnership representative can be chosen by the partnership or assigned by the IRS. As a result, it is important to understand how and when a partnership representative is designated.
A partnership with 100 or fewer partners may elect out of the new partnership audit rules and be subject to the old audit rules. Many factors need to be considered to make this election, including an understanding of the old audit rules as compared to the new audit rules and the corresponding impact on incoming and outgoing partners for the audit years in question. Certain specified procedures are required to elect out of the new partnership. The opt-out election must be made in a certain manner and at a specific time frame to make the election valid.
Our tax professionals here at GCS have the knowledge and detailed understanding of both the new and old partnership audit rules. We can serve to guide you in making the right decision in how your partnership will be audited. Please don’t hesitate to contact us with questions or concerns or if you would like to meet with us to discuss this issue or any of your other financial or tax needs.
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