Over time the IRS has struggled with how best to efficiently conduct audits of partnership income tax returns. Various approaches have been tried. Significant changes have now become effective. Even though the first partnership tax returns for which the new audit rules will apply will be for 2018 tax returns, not due to be filed until 2019, partnerships will need to deal with a couple of important matters before their 2018 returns are filed.
First, the appointment of a Partnership Representative, a new position, is required. The Partnership Representative will serve as the audit contact and will have the authority to bind the partnership and its partners to audit adjustments. Given the power the Partnership Representative will have under the new rules, careful attention needs to be given regarding whom the partnership designates. The partnership may want to include procedures or contractual limitations on the power of the Partnership Representative in its partnership or operating agreement.
Certain partnerships will be able to elect to “opt-out” of the new rules. A partnership will qualify for this election if the partnership has (1) 100 or fewer partners and (2) only partners who are individuals, corporations (including S corporations), and estates of deceased partners. Partnerships with trusts (even grantor trusts), other partnerships, or disregarded LLC’s as partners will not qualify for this election. The opt-out election out must be made annually on a timely filed tax return. For partnerships qualifying to opt-out, we believe that will be the preferred course of action in most cases.
A partnership is required to either disclose the Partnership Representative or make the opt-out election on its 2018 partnership tax return. We strongly encourage persons who manage tax partnerships to address the new rules with their tax professionals before the upcoming tax filing season.
For more information on how Dean Dorton can help you with this, visit the link below:
Matthew Smith, CPA, CFE
Tax Associate Director
msmith@deandorton.com • 859.425.7774