At the end of 2015, the Bipartisan Budget Act of 2015, as amended (the “BBA”), was enacted into law, and will be effective for tax years beginning after 2017. Under the BBA, the rules relating to the audit of partnership tax returns have been completely revamped and under these new rules, a tax partnership, itself, may be liable for tax, penalties and interest in connection with the audit of a partnership/LLC.
The BBA is complicated and subject to numerous qualifications and exceptions, including for certain eligible entities, an ability to opt-out of the new partnership audit rules. In addition, the BBA eliminates, the old “tax matters partner”, and creates the new role of “partnership representative” for partnership/LLC dealings with the IRS, and grants the new “partnership representative” broad authority in dealings with the IRS, while at the same time eliminating some of the historical statutory protections accorded to partners of a partnership in connection with a partnership/LLC audit.
In light of the BBA and its effective date for tax years commencing after 2017, it may be time to dust off your Partnership/Operating Agreement to re-visit your tax provisions and to consider whether an update in light of the BBA is appropriate, including as to the allocation of any taxes imposed on the partnership/LLC, whether a specific partner tax indemnity is warranted, whether the Partnership/Operating Agreement should provide for affirmative information rights and limits on the partnership representative’s broad statutory authority. Unfortunately, one size does not fit all and whether or not changes to a Partnership/Operating Agreement are appropriate will depend upon each company’s individual situation. As always, we are here to help.