Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.

 Skip to Content

Partnerships Must Respond to New Audit Rules
April 25, 2016

The recently-enacted Bipartisan Budget Act of 2015 includes a far-reaching overhaul of the rules applicable to IRS partnership audits and tax adjustments. This will be significant for partnerships and limited liability companies taxed as partnerships (collectively, "Tax Partnerships"), as well as for firms that sponsor, advise, or market Tax Partnerships to investors.

Although the changes generally take effect beginning in 2018, and Treasury regulations will be issued that contain the specifics of the law’s operation, it is important to act now to evaluate how the new rules will impact both existing and newly-formed Tax Partnerships and to take responsive actions. Such actions may include amending existing partnership and LLC operating agreements, and planning whether to now make certain elections further discussed below.

Under the Act, a Tax Partnership will be liable for any additional tax, interest, and penalties imposed due to any partnership audit adjustment, under principles substantially different from those that have previously applied. Among other things, any IRS adjustments generally will be taken into account at the Tax Partnership level, rather than allocated to its partners, in the year the audit or judicial review is completed, and the cost of any adjustment will flow to the partners/LLC members in that year, rather than to those partners who benefitted in the tax years under audit.

Nevertheless, the Act allows certain Tax Partnerships with 100 or fewer qualifying partners/members to opt out of the new audit rules by making an annual election on timely filed returns. The Act also permits Tax Partnerships to "push down" the audit adjustments to prior-year partners and prescribes how to make that election.

The Act further provides for audits to be handled by a "designated partnership representative," who can be a partner/LLC member or any other person with a substantial U.S. presence. This replaces the concept of a "tax matters partner" under current audit rules.
Authored By
Image: David P. Burke
David P. Burke
Image: Jordan D. August
Jordan D. August
Related Practices
Securities Litigation and Enforcement Tax
©2024 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.