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New Partnership Level IRS Audit Rules: Designate Your Partnership Representative and Modify Your Partnership Agreement

AAFCPAs would like to make clients aware that, effective for partnership tax years beginning after December 31, 2017, the IRS instituted new partnership level audit rules.  Specifically, any adjustment to items of income, gain, loss, deduction, or credit of the partnership during a partnership’s tax year, upon audit, will be assessed and collected at the partnership level rather than at the partner level. AAFCPAs advises clients to designate a Partnership Representative to ensure appropriate oversight and representation with respect to IRS audits and other proceedings.

Identify a Partnership Representative

Regarding these new IRS procedures, the Bipartisan Budget Act of 2015 coined a new term: “Partnership Representative.”  For the most part, this individual will have sole authority to act on behalf of the partnership and will have the only lines of communication with the IRS with respect to audits and other proceedings.  There are exceptions, noted below. Most current partnership agreements provide for, and specifically identify, a Tax Matters Partner.  AAFCPAs encourages clients at this time to initiate internal conversations on who will be designated as the Partnership Representative.  Furthermore, given the level of authority in the hands of this individual, AAFCPAs also encourages clients to consider amending partnership agreements to include specific language concerning a Partnership Representative, in addition to the existing Tax Matters Partner.  The Partnership Representative must have a “substantial presence” in the United States (as defined in the Code); however, the IRS does not require this individual to be a current partner.

The applicability of any interest, penalty or additional tax adjustment will be determined at the partnership level, and subsequently agreed to by the Partnership Representative.  These new rules require just one notice and related correspondence be given at the partnership level, thereby replacing previous procedures which required separate notices/adjustments to be sent to all partners of a partnership that were effected by an IRS audit.

Who does this apply to?

This general rule does not apply to all partnerships, and provides an exemption for certain smaller partnership: partnerships with 100 or fewer partners given that each of those partners is either an individual, C corporation, a foreign entity that would be treated as a C corporation if it were domestic, an estate of a deceased partner, or an S corporation.  The exemption is provided so long as an election is made on a timely filed return to elect out of the general rule.

The new rules provide that the highest applicable rate of tax be utilized in determination of tax; however, there are provisions to account for tax-exempt partners as well as potentially reduced rates for C corporation partners.  Additionally, even if the first election is not available, a separate election is available to those large partnerships falling under the new rules, which allows those partnerships to make an election within 45-days from the date of the notice of final partnership adjustment.  This election will shift the burden of adjustment to the partners.  The Partnership Representative (on behalf of the partnership) is then required to provide, to the partners, each partner’s share of any adjustment to items of income, gain, loss, deduction, or credit so they may amend their individual tax returns.

Given the new partnership level audit rules, AAFCPAs encourages clients to consider reviewing and potentially amending your existing partnership agreements.  New or amended partnership agreements are encouraged to consider who has the authority, and in what situations certain elections are made.

If you have any questions, please contact your AAFCPAs partner or Richard Weiner, CPA, MST at 774.512.4078 or rweiner@nullaafcpa.com.

About the Author

Richard Weiner CPA
Rich has over 30 years of broad tax experience with a specialty in tax planning and consulting for private and publicly-held businesses. Rich has specific expertise in the Software, Bio-Technology, Medical Device, Life Science, Manufacturing, Retail, Professional Service and Publishing industries, as well as U.S. aspects of international taxation. He works extensively with European companies expanding into the U.S. market. Additional areas of focus include companies and stockholders in transition, including structuring of and planning for Mergers & Acquisitions, planning for changes in ownership and management, and adoption of tax methodologies with a view toward the long term. He is well known in his field and is a frequent speaker on a variety of tax related topics.