In 2015, Congress enacted significant changes to partnership audit and adjustment rules that will become effective in just a few months. These changes were enacted with the expectation of increasing federal tax revenues from audits of LLCs and partnerships.
The new rules generally apply to entities that will file partnership returns for the 2018 and subsequent years. Most of these entities will need to revise their operating agreement to comply with the new requirements.
Important new provisions that may impact you
- The IRS may collect any additional tax, interest, and penalty directly from the partnership rather than from the partners (the tax will generally be assessed at the highest individual tax rate).
- Current partners could be responsible for tax liabilities of prior or deceased partners.
- New elections and opt-outs will be available for certain entities - your agreement will need revision to specify who makes these decisions.
- There are new tax terms and concepts that need to be incorporated in the partnership’s operating agreement.
Particularly, the new term “partnership representative” replaces the prior “tax matters partner.” The partnership representative is critical; they will act at 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 current Manager or General Partner of the entity should contact their business attorney to discuss these new requirements. The operating agreement revisions should be in place prior to December 2018.
If your existing agreements have been recently prepared, you may be able to simply arrange for an amendment to the existing documents. For those entities with older documents, this is an ideal time to have a thorough review and revision to be certain that your agreements meet all current requirements.
While the document changes must be prepared by your business attorney, we can assist you in understanding the implications of these new requirements for your particular situation. It is likely that most of these entities will qualify for the “opt-out” rules, but the operating agreement must be properly revised to meet this requirement. Please do not hesitate to contact us to discuss these issues.