The Bipartisan Budget Act of 2015 (the “BBA”), which implements new rules for auditing partnerships and LLCs taxed as partnerships,[1] went into effect in January 2018. Under the new BBA procedures, if selected for an audit, any adjustment for a partnership tax year is determined at the partnership level. If the adjustment results in an underpayment of tax, the IRS will assess and collect the imputed underpayment, interest and penalties from the partnership, not from the individual partners, and the payment will be determined using the highest individual or corporate rate of tax. See 26 U.S. Code § 6225. While any IRS adjustments will relate to the tax year reviewed, the imputed underpayment will be assessed in the adjustment year when the audit is completed. As a result, the remaining (or new) partners during the adjustment year may bear the underpayment liability, not the individuals who were partners during the reviewed tax year.
The BBA allows partnerships to annually opt out of the BBA audit procedures. This can be accomplished by making an annual opt-out election on a timely-filed partnership tax return. See 26 C.F.R. 301.6221(b)-1(c)(1). Because the partnership’s decision to elect out of the audit regime will be subject to IRS review, partners should consider including opt-out provisions within the tax matters provisions of their partnership or LLC operating agreements.
In addition, every partnership subject to the BBA audit procedures will have a “partnership representative” for years beginning January 1, 2018. A partnership representative has increased authority, as compared to the designation of the “tax matters partner” under the old regime. For instance, a partnership representative has the exclusive authority to represent a partnership during a tax audit and negotiate a settlement with the IRS. The IRS has the right to designate the partnership representative if the partnership fails to do so in advance. Accordingly, it is advisable to update the tax matters provisions of the partners’ agreement to include the necessary designation.
With the recent changes in tax laws effecting partnerships (including LLCs taxed as partnerships), business owners should consult with their tax advisors and legal counsel with respect to amending their partnership or LLC operating agreements.
[1] Single-member LLCs and LLCs that have elected to be taxed as S-Corporations are not impacted by this change.
Alex Gertsburg is a managing partner at Gertsburg Licata. He may be reached at (216) 573-6000 or at [email protected].
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This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
