By: Amanda Wilson
While the news is filled with the ongoing tax reform activity in Congress, there is one tax change that is already in place to take effect January 1, 2018 – the repeal and replacement of the tax audit regime for partnerships. For all tax years beginning on or after January 1, 2018, the existing TEFRA audit regime is being replaced with a new audit regime. The tax matters partner is being replaced with a partnership representative – and the partnership representative is the only person that the IRS will deal with when auditing the partnership. The partnership representative has the sole authority to participate in the audit and bind the partnership when it comes to dealing with the IRS, so it will be important to get the selection of your partnership representative correctly. Once chosen, the partnership representative cannot be changed for a tax year without the IRS’s consent. In addition, if there is a partnership audit, any adjustments will be made at the partnership level and will result in a tax liability for the partnership unless the partnership elects to push out the liability to the existing partners. This means that a partner can be liable for tax adjustments for periods in which that partner did not have an ownership interest even in the partnership! Due diligence for acquisitions of partnership interests that occur after January 1, 2018 will be much more involved on the tax side as a result.
So, if your ownership structure includes entities that file an IRS Form 1065 Partnership Tax Return (which can and usually does include multi member limited liability companies), you need to look at your organizational documents to see if they address these upcoming audit rule changes. If you do not see the term “partnership representative” anywhere, then you will likely need to update.