Changes to partnership audit procedures may prompt the need for review
Congress recently enacted significant changes to partnership audit and adjustment rules, expected to lead to higher audit rates for partnerships. Partners should carefully review and possibly revise their partnership’s operating agreement in response to these changes.
While these rules generally apply to partnership returns filed after 2018, proactive planning today can mitigate potential negative impacts.
Key provisions to consider include:
1. The IRS can collect any additional tax, interest, and penalties directly from the partnership at the highest individual tax rate, rather than from individual partners.
2. Current partners may be held liable for tax liabilities of former partners.
3. New elections and opt-outs are available, necessitating agreement revisions to specify decision-making authority.
The updated rules introduce new tax terms and concepts, requiring adjustments to partnership agreements. Particularly, the “tax matters partner” has been replaced by the “partnership representative,” who serves as the primary contact with the IRS during audits and has the authority to bind both the partnership and its partners.
Partnerships with 100 or fewer partners have the option to opt out of these provisions annually by filing an “opt-out” election with their Form 1065 tax return. Consulting our offices can help assess the benefits of opting out and explore other strategic planning opportunities tailored to your situation.
Please contact a ShindelRock tax professional if you would like to discuss these new partnership changes and review your planning opportunities.