A recent law change removed the requirement that the IRS perform the often complex calculations to allocate audit adjustments to the relevant partners. As a result, there are big changes ahead for partnerships subject to these rules, likely including more frequent IRS audits. Here are five things you should know about the new rules:
- The law requires the IRS to assess tax, penalties, and interest to the partnership rather than the partners. Tax is calculated at a flat 39.6% rate, but that rate can be reduced under certain circumstances. Amended partnership tax returns will have similar treatment.
- Affected partnerships can allocate adjustments to the appropriate partners rather than pay tax at the entity level.
- Partnerships with fewer than 100 partners can elect out of these rules but only if they don’t have another partnership or certain trusts as partners.
- Partnerships must designate a representative who will have sole authority to act on behalf of the partners with regard to an audit. Operating agreements may need to be amended to define the desired actions of the representative.
- The new rules are effective beginning for audits of 2018 tax returns. While much more guidance will be issued before the rules become effective, taxpayers should understand right now how these rules could impact existing partnerships or the sale/purchase of a partnership interest.