New Rules Ahead for Partnership Audit Procedures

September 21, 2017

Significant changes to partnership audit and adjustment rules are slated to go into effect for taxable years beginning after December 31, 2017. The new rules are expected to dramatically increase the audit rates for partnerships and will require partners to carefully review, if not revise, their partnership agreements.

The changes include the following:

  • The IRS may collect tax, interest, and penalty related to audit adjustments directly from the partnership rather than from the partners (the tax will be collected at the highest individual tax rate unless successfully challenged).
  • Current partners could be responsible for tax liabilities of prior partners.
  • New elections and opt-outs will be available and your agreement may need revision to specify who makes these decisions.
  • There are many new tax terms and concepts that will likely require you to adjust your partnership agreement.
  • New audit rules introduce the concept of a “partnership representative” (replacing the prior “tax matters partner”) who will act as the single point of contact between the IRS and the partnership and will have full authority to bind the partnership and the partners during an audit.

The IRS has issued proposed regulations which provide guidance on the new rules and will hold a hearing this month to receive comments and testimony. The AICPA has requested a one-year deferral of implementation along with clarification of many of the provisions currently included in the proposed regulations.

Please reach out to your Lohman Company advisor with any questions or concerns about these new changes. We would be happy to coordinate a meeting with your partnership attorney to discuss your agreement.