The Internal Revenue Service (IRS) has issued regulations regarding partnership audit rules effective for partnership tax years beginning on or after January 1, 2018 and may require an amendment to the partnership’s operating agreement.
Partnerships must designate a partnership representative (PR) with a substantial U.S. presence.
- Substantial presence requires availability to meet with the IRS in the U.S., a U.S. taxpayer identification number (TIN), a street address in the U.S. and a telephone with a U.S. area code.
- The PR receives all audit and other IRS correspondence and has the authority to bind the partnership.
- Designation of the PR is made on the partnership’s Form 1065 tax return for the tax year to which the designation applies and is effective on the date the partnership return is filed.
- The PR is not required to be a partner in the partnership.
- If no PR is appointed, the IRS will designate one.
- In general, it makes sense for a new partnership to designate its PR when formed.
Partnership audits will be conducted at the partnership level.
- IRS adjustments will be determined, and any tax will be assessed and collected, from the partnership, generally at the highest individual or corporate tax rate in effect for the year the audit adjustments become final.
- The adjustments and tax will NOT be assessed and collected from the partners for the year under audit at each partner's tax rate.
- Partners are not able to opt out of the partnership procedures.
Eligible small partnerships with 100 or fewer partners can elect out of the partnership audit rules for any tax year. The election must be made every year on the timely filed Form 1065.
- If the election out is made, all adjustments and tax will be assessed and collected on amended returns from the partners for the year under audit at each partner’s tax rate.
- The election out is only available if each of the partners are eligible: Individuals, C corporations, estates of deceased partners, certain foreign entities and S corporations are eligible partners.
- A partnership that has an S corporation partner must furnish the names and TINs of each S corporation shareholder. Also, each of the S corporation shareholders must be counted as a partner for determining the 100-partner threshold.
- Partners that prevent the entire small partnership from being able to elect out are partnerships, trusts, disregarded entities, estates of individuals that are not deceased partners and certain foreign entities.
If not eligible for the small partnership election out, the partnership can make a valid “push-out” election within 45 days after receipt of the final IRS audit adjustments.
- The partnership must provide statements to the IRS and to each of the partners from the audited year showing each partner’s share of the adjustments.
- The partners pay tax on the adjustments in the year the statement is furnished, plus interest.
All partnerships for which we prepare tax returns will receive a form from our office to complete and return as soon as possible, regarding specific information about partners and the partnership representative to be designated.