The Internal Revenue Service (“IRS”) reissued proposed regulations that will substantially change the way it examines partnerships and LLCs treated as partnerships. The regulations govern the assessment and collection of partnership taxes, and are effective for partnership tax years beginning on or after January 1, 2018. While the number of partnership audits by the IRS is expected to increase, the new rules are expected to reduce the administrative burden on the IRS. The rights and expectations of partnerships and its partners will change significantly with regards to notice, participation rights, and payments. The new rules propose: (1) the implementation of a new centralized audit method and (2) the designation of a chosen partnership representative.
(1) Implementation of a New Centralized Audit Method
The new rules significantly change the existing rules by requiring the partnership, rather than the partners, to pay any tax deficiencies and by limiting the rights of the partners to participate in the audit proceedings. The new regulations provide a centralized partnership audit regime that will replace the current cumbersome procedures with two streamlined methods: default and alternative.
Under the default method, the partnership becomes the taxpayer and all deficiencies, assessments, penalties, and interest charges will be collected at the partnership level. The total partnership adjustment is multiplied by the highest effective tax rate, then increased or decreased by partnership credits for the partnership tax year being audited to determine the total amount due. If the final result is positive, this amount is the imputed underpayment. If the result is less than zero there is no imputed underpayment. The new rules also have specific information pertaining to multiple imputed underpayments. This amount may be reduced if there is specific information pertaining to a partner that reduces the deficiency, or if a partner has filed an amended tax return and paid the tax due based on the adjustment.
If the alternative method is elected, the partnership can push the audit adjustments to the entities or individuals who were partners for the year under audit. This method requires the partnership to issue revised Schedules K-1’s and impose higher interest rates on any underpayment, therefore alleviating the IRS from that responsibility.
In certain situations, the IRS will allow small partnerships to opt-out of this new system. The partnerships who choose to make the election to opt out must have 100 or fewer partners consisting of individuals, estates of deceased partners, C Corporations, S Corporations and certain foreign entities; partnerships whose partners are other partnerships, trusts, or disregarded entities are disqualified from opting out.
(2) Designation of a chosen partnership representative who will have the sole authority to act on behalf of the partnership and all partners
The new audit system requires that all partnerships designate a partnership representative on its timely-filed federal tax return to act on all partnership proceedings with the IRS. The partnership representative may be an individual, a partner, a non-partner, or an entity. If an entity is chosen, an individual must be appointed to act on the entity’s behalf. This representative appointment also applies to the partnerships that have opted-out because the IRS is not required to communicate with anyone other than the partnership representative,
The proposed rules grant the partnership representative with the sole authority to act on behalf of the partnership and all of its partners by agreeing to:
• Settlement disputes
• Notice of final partnership adjustments
• Elections to pay the partnership liability at the partner level
• Extensions of the limitation period for making partnership adjustments
Under the new rules, if a partnership has received an adjustment notice with an imputed underpayment, only the partnership representative may request an adjustment modification, but if the notice does not have an imputed underpayment, the partnership may not request an adjustment.
The partnership has the flexibility to control the rights of the partners and representative through a contract that specifies terms regarding notice and consent of other partners, but the IRS is no longer burdened with this responsibility. Partners and partnerships must evaluate their current agreements to ensure that their interests are protected with respect to indemnity, claw-back, notice, and mandatory voting provisions.
Is your partnership prepared for the new rues? Contact Global Law’s experienced tax attorneys to review your partnership agreement today.Please share:
- 1 Nov, 2017
- suzette blackwell
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- Centralized Partnership Audit, Global Law, Partnership Taxes,