As result of the Bipartisan Budget Act (BBA) of 2015, Congress has effectively changed the way partnerships are audited and, ultimately, taxed. The new rules, which we had hoped would be delayed, dramatically affect entities taxed as partnerships – including limited liability companies (LLCs).
The changes impact:
Whether the partners or the partnership itself will be responsible for paying an IRS adjustment. If you do not take affirmative steps, your partnership (and its current partners) will be responsible for paying tax liabilities attributable to positions taken by prior-year partners. Under the old law, partners that took a reporting position would have been responsible for any subsequent IRS adjustment resulting in a tax deficiency. The new law places the payment obligation on the current partnership (and its current partners).
The amount the partnership or partners will have to pay as a result of an IRS adjustment to the partnership return. If you take no affirmative steps, the partnership could be responsible for paying a larger tax liability than would otherwise have been the case under the old rules. There are, however, amendments you can make to your partnership or LLC agreement to ensure this tax liability is reduced.
The person with authority and responsibility for defending an audit of the partnership. Under the old law, each partner potentially impacted by an IRS adjustment received notice of an IRS audit of the partnership and had the ability to defend against any potential adjustment. Under the new law, all IRS notices are sent to one person (named a “Partnership Representative”). Neither the Partnership Representative nor the IRS has a duty to inform the partnership or its partners of a proposed IRS adjustment. Moreover, the Partnership Representative has no obligation to defend against a proposed IRS adjustment. There are, however, steps you can take to change this result.
We strongly recommend you contact your attorney to discuss the BBA Partnership rules. Although the rules make sweeping changes, there are steps you can take to reduce the effects of those changes. The new rules take effect, in most instances, on January 1, 2018, so you should take immediate action.