New federal rules taking effect in 2018 that will affect partnerships and limited liability companies have prompted law firms to alert clients that they should review and amend their governing documents and designate a partnership representative in case of an audit by the IRS.
At least one firm, McDonald Hopkins, has created an entire program to address the changes that partnerships and limited liability companies may need to make. These businesses must elect a “partnership representative” who will have sole decision-making power for the company and all shareholders in discussions with the IRS. Those decisions include whether the partnership or a particular partner will pay any underpayment in taxes the audit finds. Partnerships that don’t designate a partnership representative will have one designated by the IRS.
“This person who serves as partnership representative has unfettered authority to act on behalf of the partnership,” said Jordan August, an associate at Carlton Fields Jorden Burt in Tampa who has been working with clients on the issue along with shareholder Cristin Keane. “It has become such an issue with partnerships because the new act gives all this authority to the partnership representative. It is imperative that the contractual terms of your partnership or LLC cover and address the manner in which the partnership representative will act on behalf of the partners in the event of an audit, including whether a push out election will be made. In the event that an additional tax is assessed, who will ultimately bear the burden of paying those additional taxes?”
The new rules also potentially shift the tax liability for LLCs and partnerships. Eligible partners need to decide annually whether to opt out of the new rule that provides that if the business is audited it will pay any underpaid taxes at the partnership level, or instead choose to be taxed at the traditional individual partner level, said Carlton Fields’ Keane, who said she has been advising clients engaged in new partnership and LLC agreements as well as past partnership contract clients about the issue for the past year.
The changes, part of the Bipartisan Budget Act of 2015 and effective Jan. 1, are designed to raise tax revenue and make it easier for the IRS to audit partnerships and LLCs. Traditionally, the IRS audited and assessed tax on the partners or members rather than the entity itself. The new regulations centralize the assessment and collection of unpaid tax directly at the entity level from the partnership or LLC.
“It will be easier for the IRS to do an audit of just one entity, and less expensive for them as well, because they won’t need as many people out in the field,” said Raquel “Rocky” Rodriguez, Miami office managing partner at McDonald Hopkins. “If the audit is done at the partner level, the IRS currently has to seek out each member and do an assessment.”
In addition to the new services McDonald Hopkins is offering, which include providing a partnership representative, the firm has also added a partnership audit services page to its website.