Attention Partnerships: New IRS Audit Rule Changes Must Be Made by Year-End
posted Dec 4, 2018 by Laura H. Yalanis, CPA, MST in the Global Tax Blog
Attention partnerships…are you up to speed on the new IRS audit rules? The new procedures are in effect for tax years that begin on or after January 1, 2018. Make note that your operating agreements must be revised to deal with some new provisions.
More about the new procedures
Check out our blog, The New Partnership Audit Rules...Are You Up to Speed?. Essentially, the new procedures (which became effective January 1, 2018) are designed strictly to help the IRS with audits for partnerships and limited liability companies, or LLCs.
As our previous blogs point out, the 2015 budget act replaces the TEFRA (the Tax Equity and Fiscal Responsibility Act) partnership audit rules by generally requiring large partnerships to be audited at the partnership level — and for tax adjustments to be made and collected from the partnership.
Key change- Partnership Representative Role
A key part of the new regime is the institution of the “Partnership Representative” or PR. The PR is to be designated each year by the LLC/partnership in its federal tax return. This new role replaces the Tax Matters Person designation, which was eliminated in the 2015 budget act.
What are the responsibilities of the PR?
The PR is responsible for dealing with the IRS on tax matters (including tax assessments LLC members may be liable for). The only person the IRS technically has to interact with is the PR.
Hence, it is entirely possible for the PR to conduct the entire audit and settlement with the IRS without any interaction with the partners or members. Partners and members may not find out about an audit unless or until they receive an assessment.
Does the IRS determine whether or not the PR has authority to make decisions for the partnership or LLC?
By definition in the new law, the PR has the authority so no the IRS does not need to determine this.
Do LLC members and partners have any authority over the PR?
Partnerships can designate provisions in their operating agreements that require notice to members and prior members before PRs take action on an issue.
In what way should operating agreements be revised?
As a bit of background, an operating agreement is a key document used by LLCs, outlining the business’ financial and functional decisions including rules, regulations and provisions. Under prior law, someone in every LLC/ partnership was designated as “tax matters partner” to represent the partnership before the IRS in all tax matters.
To factor in the new PR role, many partnerships and LLCs are going to the tax section of their operating agreement and simply replacing “tax matters partner” with “partnership representative,” which is not a solution. The former “tax matters partner” role does not encompass all the responsibilities and “powers” of the PR.
Instead, partnerships should be thinking about revising their operating agreements to reflect these issues and related matters:
- Consider including a provision that prohibits an ineligible partner from becoming PR
- Consider requiring consent of a majority before the PR is able to waive the statute of limitations, settle something with the IRS or push out the payment obligation from the partnership to the partners
- Include a provision which requires timely notice from the PR of all IRS communications
- Include a provision which requires partners to give the PR the information he/she needs to impose the most cost effective tax bracket on an assessment.
The partnership audit process is extremely complex, and could take your business a while to adapt to, so taking action sooner rather than later is key! Contact us if you have questions on dealing with these tax law changes.