There are new, significantly changed audit rules that apply beginning with your 2018 tax return. Every entity taxed as a partnership (which includes most LLCs) will have to take some action with respect to these new rules. These new rules fundamentally change the way in which tax liability is assessed and collected – the default rule is that the partnership itself is liable for the tax due as a result of audit adjustments. There is an election out of the new rules – but its application is very limited.
If an entity is subject to the new rules, it must designate a partnership representative on its 2018 tax return. If it does not do so, the IRS will make the designation. The current Tax Matters Partner will not simply become the partnership representative. The partnership representative (PR) is the sole person who deals with the IRS during the audit. The PR can bind the partnership and all partners and no other partner has any right to notice or participation in the audit.
In order to best protect your business and its owners, it is critical that your operating or partnership agreement(s) address these new audit rules. Every operating or partnership agreement should be amended.
We are here to help. We can provide you with an overview and understanding of the new rules, help you determine the best way to approach these rules in the context of your business arrangement and prepare amendments to your operating or partnership agreement(s).