IRS Audit Rules Change: Weak ‘Tax Matters Partners’ Out, Strong ‘Partnership Representatives’ In
Comprehensive regulation changes that went into effect for tax year 2018 under the Bipartisan Budget Act of 2015 (BBA) will start to have real impact on your partnership or limited liability company (LLC) if you are notified of an IRS audit in this or any future year.
The rules are designed to streamline and, most of all, centralize, audit procedures and decision-making for entities taxed as partnerships, which includes any LLC with two or more members.
Unlike previous law, audits and the resulting tax adjustments now will be assessed and collected at the entity level – not at the individual partner level – though, of course, partners still can be liable for what is not collected. One key step to this centralization of decision-making at the entity level was to replace old requirements for a “Tax Matters Partner,” with new rules requiring every partnership to have a single “Partnership Representative” who can make tax decisions for the partnership.
The Partnership Representative’s powers to bind the partnership or LLC, and every partner or LLC member, on audit issues go far beyond what Tax Matters Partners could do. Under the new rules, Partnership Representatives generally have sole authority to act for the partnership or LLC in all audit matters, including any related administrative proceedings or litigation. They can bind the entity and the partners or members to settlements with the IRS, single-handedly agree to extend the applicable statute of limitations, and make elections to push out any partnership level audit adjustment liability to the partners or members. The new audit rules do not give partners or members a right to participate in audits or related litigation, or even to be notified of the audit.
Partnerships and LLCs should consider how to best navigate this new regime, including, if eligible, opting out of the BBA regime, or updating their governing documents to impose controls on the Partnership Representative’s far-reaching authority.
Depending on the tax classifications of their partners or members, many partnerships and LLCs with 100 or fewer partners may be eligible to elect out of the BBA regime on their timely filed tax return. Audits would then be conducted at the level of the individual partner or member, and there wouldn’t be a need for a Partnership Representative.
Partnerships and LLCs that can’t, or do not want to, opt out can still update their partnership or operating agreement to impose checks on the Partnership Representative.
These provisions will not be binding on the IRS, but they can create duties that the Partnership Representative owes to the other partners or members. Some examples of these include requiring the Partnership Representative to notify partners of any audit, or to obtain majority consent for extensions of statutes of limitation, IRS settlements, or agreements pushing out partnership liability to the individual partners or members.
Ray Sherbill is a corporate attorney helping businesses and business owners throughout the Mid-Atlantic region. For more information on how the IRS regulation changes affect partnerships and LLCs, contact Ray at [email protected].