For tax years beginning after December 31, 2017, new rules will apply by default to partnerships and entities taxed as partnerships. Below is a brief summary of the relevant rules, enacted in 2015 under the Bipartisan Budget Act of 2015 (the Act).
There is a provision to allow partnerships to opt out of the provisions, but only if the partnership has fewer than 100 partners in the partnership and no partners that are trusts or partnerships. The elect- out is due on an original, timely filed tax return.
Under the Act, the IRS can assess audit adjustments at the entity-level as opposed to passing out the tax assessment to the partners. Additionally, the assessment will be the responsibility of the partnership in the year the audit is concluded. The tax will not be retroactively applied to the audit year; accordingly, if there was a change in the partners, the effect of the adjustment would potentially have an economic cost to partners that were not partners during the year under audit.
The adjustment at the partner level would be treated as a non-deductible expense, which would affect the partner’s basis in its partnership interest.
There is available recourse – within 45 days of the issuance of an audit adjustment, partnerships subject to the new rules, have the option to elect to pass the assessment to the partners of the tax year under audit. The election will effectively pass the obligation to the partners who previously received a tax benefit associated with the adjustment item.
Another change is that partnerships will no longer have a “tax matters partner”, but rather a “partnership representative”. Previously the tax matters partner was required to be a partner in the partnership. The “partnership representative” who will not be required to be a partner, will presumably have significant authority, so careful consideration should be given to the selection.
A few final comments, the above is intended to draw your attention to some of the major changes. We encourage you to contact your attorney to discuss how the changes will affect your partnership or LLC agreement. Additionally, because audit adjustments may affect future partners, we suggest you exercise care when evaluating becoming a partner in an existing partnership as contingent liabilities may exist for positions taken on previously filed tax returns. Under the new rules, you may be obligated on a future tax assessment.
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