New Partnership/LLC Tax Audit Rules

Under recently issued new rules, the IRS will conduct a single partnership audit, and partners have no rights to participate.  A “partnership representative” will have the sole authority to act on a partnership’s behalf with the IRS.  If an audit results in an adjustment, the default rule is that the partnership itself will be liable for the taxes.  Partnerships may, however, elect to push out the tax liability to their partners (including persons that were partners for the audited year and subsequently left the partnership).

Partners or members may want to examine their partnership and LLC agreements and consider an additional section naming a partnership representative and perhaps limiting the representative’s ability to make decisions on behalf of the partnership without partner approval.  Additionally, the agreements might address situations where the partnership is liable for additional taxes based on an IRS audit and the mechanisms for paying that liability.

Because former partners may be liable for taxes even after they leave a partnership, and have no right to independently settle or challenge audit adjustments, the new rules will also impact partnership and membership interest purchase agreements, redemption agreements, merger agreements and dissolution agreements.