The 2015 Bipartisan Budget Act (the “BBA”), which was signed into law on November 2, 2015, modified certain audit and tax election rules for entities taxed as partnerships (including most LLCs). The IRS has now issued proposed regulations that will take effect on January 1, 2018, which will have implications that necessitate review and action. Below is an overview of the new regulations.
Designation of a Partnership Representative
After December 31, 2017, audits for partnership proceedings will no longer be handled by a “Tax Matters Partner.” Instead, beginning on January 1, 2018, each partnership must designate a person (who need not be a partner) to serve as the “Partnership Representative.” The Partnership Representative will have sole authority to act on behalf of, and bind, the partnership in an administrative or judicial tax proceeding. This means that only the Partnership Representative is entitled to notice of audit and will have authority to bind the partnership in an audit proceeding unless restricted by the other partners by including provisions in their operating agreement as to the Partnership Representative’s obligations and responsibilities, as well as an indemnification clause for any resulting financial loss.
Partnership-Level Assessment for Tax Liabilities
Under prior law, partners in a partnership were provided an opportunity to meaningfully participate in administrative and judicial proceedings because it was the partners, and not the partnership, that would ultimately bear the tax burden. The new BBA rules, however, take the exact opposite approach: any additional tax liabilities discovered during a partnership audit (including penalties) will be assessed against the partnership itself in the year in which the audit result becomes final. This will allow for previously- departed partners to potentially escape liability altogether. A partnership is allowed to make a “push-out” election from this regime, pursuant to which it can push-out liability to partners from the audited year. The Partnership (by and through the Partnership Representative) can “push out” the resulting tax and penalty to the 2018 partners, but this election must be made within 45 days following a final audit determination by the IRS.
Small Partnership “Opt-Out”
Partnerships with fewer than 100 partners, all of whom are “eligible” partners, can elect out of the BBA regime, resulting in individual audits for each partner. For purposes of this “opt-out” election, which must be made annually on the partnership’s timely-filed income tax return, partners are “eligible” only if they are individuals, S corporations, C corporations, foreign entities which would be C corporations if it were a domestic corporation under IRS rules, and estates of deceased partners.
If you or someone you know will be affected by this new regime, please contact us at (786) 837-6787 or email us firstname.lastname@example.org to set up a meeting so we can help amend your partnership or operating agreement to reflect the designation of a Partnership Representative and to make clear the responsibilities of partners for years under audit.
*Disclaimer: This blog post is not intended to be legal advise. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*