Have You Amended Your Partnership Agreement Yet?
If your first reaction is “Why would I need to?”, then we need to chat. The new partnership audit rules go into effect for the 2018 tax year. These new rules will make it more attractive to the IRS to audit partnerships, especially tiered partnerships, and can result in assessments to partners who may not have been partners in the year under audit.
The new rules allow the IRS to collect assessments from the partnership, rather than the partners. It is much more efficient for the IRS to collect from one source rather than hundreds of partners so expect to see more audit activity for 2018 and beyond. It could also mean the partners in the year the audit takes place may be paying for different owners who were partners the year under audit. Does the partnership agreement address how an audit assessment will be handled? If you haven’t amended recently, it probably doesn’t.
The Tax Matters Partner (“TMP”) is out, and the Partnership Representative (“PR”) is in. This is a significant change. While the TMP was a point person, the PR has real power. The PR is the only one with the authority to work with the IRS, including authority to legally bind the partnership to pay assessments. Worst of all, if your partnership doesn’t designate one, the IRS will select one for you. Partnership agreements should consider how this person, or entity, will be selected each year and what additional responsibilities he has to partners.
Whether you are managing a partnership, a current partner, or someone considering making a new investment in one, you will want to understand how these new rules impact you. Smith Leonard can help you understand the complexities and your options.