The IRS recently issued proposed regulations (REG-136118-15) that will, if implemented, govern the new partnership audit rules created by Section 1101 of the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. These new rules apply to partnerships and limited liability companies that are taxed as a partnership for federal income tax purposes beginning January 1, 2018.
The new partnership audit rules allow the IRS to assess and collect income tax at the partnership level rather than from individual partners. The new audit rules replace the partnership audit procedures created under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The new audit rules apply to tax years beginning January 1, 2018.
The Bipartisan Budget Act of 2015 replaced the TEFRA tax matters partner with a partnership representative that must be a person or entity that has a “substantial presence” in the United States. If the partnership or LLC taxed as a partnership fails to designate a partnership representative the IRS may name the partnership representative. This is one of the reasons LLCs taxed as partnerships must amend their Operating Agreement or adopt an Operating Agreement, i.e., to name a partnership representative in the Operating Agreement to prevent the IRS from doing so. The LLC taxed as a partnership cannot change its designated partnership representative without the IRS’s consent.
The partnership representative can be an entity or a person. The partnership representative does not have to be a member of the LLC. After being appointed by the partnership or LLC, the partnership representative must then be designated on the partnership’s or LLC’s tax return.
Take care when appointing a partnership representative because the partnership representative has the sole authority to deal with the IRS on behalf of the partnership or LLC and all of its partners or members with respect to the following matters: (i) settling a tax audit, (ii) agreeing to a final partnership tax adjustment, (iii) making an Internal Revenue Code Section 6226 election to pay a partnership liability at the partner level, and (iv) agreeing to a Section 6235 extension of the period for making partnership adjustments.
The new audit rules take effect January 1, 2018. There are three important take a-ways to be learned from the new partnership audit rules:
- All existing partnerships and limited liability companies taxed as partnerships that have an Operating Agreement need to amend their Operating Agreements to add provisions dealing with the new partnership audit rules and to designate a partnership representative.
- All existing partnerships and limited liability companies taxed as partnerships that do not have an Operating Agreement need to adopt an Operating Agreement that contains provisions dealing with the new partnership audit rules and that designates a partnership representative.
- All new partnerships and limited liability companies taxed as partnerships should adopt an Operating Agreement with the new partnership audit provisions and should designate a partnership representative.
Hire Us to Amend or Prepare an Operating Agreement for Your LLC that Has Partnership Tax Audit Provisions & Names a Partnership Representative
We’ve made it very easy to hire us to amend an existing LLC Operating Agreement or prepare a new Operating Agreement. The first step to hire us is to go to our Buy an Operating Agreement page.
If you have questions about adopting or amending an LLC Operating Agreement, call LLC attorney Richard Keyt at 480-664-7478 or send an email to Richard at firstname.lastname@example.org. You may also call Richard’s son LLC attorney and former CPA Richard C. Keyt at 480-664-7472 and email at email@example.com.