As of January 1, 2018, the IRS changed how it audits partnerships and limited liability companies. Intended to make partnership audits easier and more efficient for the IRS, the changes apply to any entity that chooses to be identified as a partnership when filing taxes. Let’s look at some key changes and how they might affect you.
Prior to January 1, gains, deductions, income and credits were all calculated at the partnership level, even when individual partners file for items and report them on returns. Therefore, if the IRS conducted an audit and determined there needed to be an adjustment, they recalculated individual partners’ liability and sent separate bills for tax disparities, penalties and interest.
Now, for partnerships with 100 or more partners, if an audit results in any tax adjustments—and accompanying penalties and interest—the changes are made at the partnership level. Therefore, individual partners no longer receive a tax bill that specifically attaches to them. Instead, the partnership as a whole will be required to pay the entire amount, calculated using the highest corporate or individual income tax rate applicable during the year the tax debt was incurred.
Accordingly, the IRS is no longer responsible for collecting individual debts. The partnership itself must work with the partners to collect payment or suffer the consequences.
Still, in some situations, partnerships can petition the IRS to adjust the amount: For example, if the underpayment would be lower if calculated at the partner level—either because of tax rates specific to partner types, or the types of income related to adjustments. In such a case, they might qualify for a “push out” adjustment.
Each partnership must now choose a partner to act as a representative authorized to communicate with the IRS throughout the audit and act on behalf of the partnership. Actions they take and agreements they approve are considered representative of every partner. And if partnerships don’t choose a delegate, the IRS can appoint a representative of its choosing.
Partnerships with fewer than 100 partners can choose to opt out of the new rules and still request the IRS to audit each partner separately. To qualify, all partners must be individuals, C or S corporations, or foreign entities treated as such entities, or estates of partners recently deceased.
If you are a partner in a firm, make sure that you and your company are ready to address new tax changes and those yet to come. Highland Tax Group can help: Contact us to receive expert advice today.