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28 September 2017

Law Firm Partnership Audits Are About to Change

Law Firm Partnership Audits Are About to Change

An entirely new centralized partnership audit regime has finally replaced 1982’s TEFRA partnership procedures when it comes to partnership audits. The new rules, which are part of the Bipartisan Budget Act of 2015 (BBA), apply to partnership tax years beginning January 1, 2018. Partnerships can elect to apply them to returns dated as early as November 2, 2015.

The IRS has stated that the new procedures will allow it to more effectively and efficiently audit partnerships. But how will it affect law firm partnerships? Here, we summarize two important changes with the help of the National Law Review:

  1. The IRS will no longer assess and collect tax deficiencies of the audited partnership  at the partner level. Instead, the partnership itself will be required to pay the tax assessment, unless the partnership makes an election to “push-out” the assessed liability (including penalties) to the current partners. Overlook the “push-out” election and, under the new regime, the tax liability determined for the audited tax year will be the responsibility of those who happen to be partners during the year of the audit (whether the current partners were involved during the audited year or not).
  2. The “tax matters partner” is replaced with a “partnership representative” to act with an intensely broader role on behalf of the partnership. This representative, who is not required to even be a partner and whose only major requirement is to have a strong U.S. presence, will now be the only person representing the partnership without any notice or participatory rights required to be given to any non-representative partner. Please note: This person has the sole authority to act on behalf of the partnership during an IRS audit or other tax proceedings, and their actions can bind the partnership and its partners. 

It remains to be seen how exactly the BBA's new partnership audit procedures will play out. How the rules apply to tiered structures or affect basis and capital accounts, for instance, has been hotly debated. Certain partnerships with 100 or fewer partners, and whose partners consist only of eligible partners, may be able to opt-out of these rules…but they are in the minority. All partnerships should understand the complexity of the new regime and plan accordingly, including modifying their partnership agreement. Who will be the partner representative and what provisions and contractual limitations should be placed on them? Will our partnership opt out if it is eligible? How? If you don’t know the answers to these questions, it’s time to seek help from a tax advisor.

Image Copyright: rawpixel / 123RF Stock Photo


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