Partnership Tax

Changes to IRS Partnership and LLC Audit Rules

Bradley Arant Boult Cummings, LLP, Mark Miller: “The Internal Revenue Service’s (IRS’) ability to audit partnerships1 will be greatly enhanced due to changes made by the recent Bipartisan Budget Act of 2015 (Budget Act). The new rules apply to tax years beginning after 2017, which may seem far away, but partnerships need to use this time to prepare for the changes by amending their governing documents (i.e., partnership agreements and operating agreements), selecting a new “Partnership Representative” (PR), and making decisions that will affect internal operations for years to come. Speaking at a conference on March 15, IRS Chief Counsel William Wilkins confirmed that the IRS will be ramping up its partnership audit efforts. Congress projects these new procedures to generate more than $9.3 billion in new revenue over a 10-year period.”

The article concludes with this statement:

“A final warning: Anyone that is either (1) contemplating a new . . . business that will be classified as a partnership for federal tax purposes (including an LLC or joint venture) or (2) needing to amend an existing agreement should strongly consider incorporating these changes into the new or revised agreement immediately

Emphasis added.

By | 2016-05-30T08:14:48+00:00 April 21st, 2016|Categories: Partnership Tax|0 Comments

Predicting How the New Partnership Audit Rules Will Affect S Corporations and Their Shareholders

The Journal of Passthrough Entities (CCH) “This column has three focal points: S corporations (of course!), the new partnership audit procedures and Jeanne Dixon. Yes, that Jeanne Dixon—the self-professed psychic who claimed to have predicted the assassination of President Kennedy, met with Presidents Roosevelt and Nixon and for a time was one of Nancy Reagan’s astrologers.1 What is Jeanne Dixon doing in this S Corporation Corner?  Well, it is about predicting the future. And it is about making enough predictions based on educated guesses that one or two of them may actually come true—or at least close enough to claim they came true.”

The author of this article makes three predictions.  His prediction number 2 deals with partnership agreements and operating agreements of LLCs taxed as partnerships.  He predicts:

“PREDICTION #2:

Some partnership agreements will be revised and some new ones drafted to require S corporation partners to provide annually to the partnership an accurate list of the names and TINs of the S corporation’s shareholders (i.e., the persons to whom the S corporation is required to issue Schedules K-1 for the year).

Corollary: Some partnership agreements will provide that S corporation partners must indemnify the partnership and its other partners against either: (i) partnership-level income taxes the partnership is required to pay but could have avoided had the S corporation provided the information necessary for the partnership to elect out of the entity-level audit provisions on a timely basis, or (ii) the costs to the partnership of making an election under new Code Sec. 6226.”

By | 2016-12-13T21:20:06+00:00 March 30th, 2016|Categories: Partnership Tax|0 Comments

New IRS Audit Rules for Companies Taxed as Partnerships

Paul Hastings LLP, Thomas S. Wisialowski , Erika Mayshar and Noah Metz: “Hedge funds, private equity firms, real estate companies, and other businesses structured as partnerships or limited liability companies are paying close attention to recent changes in IRS audit procedures. . . . This means that under the rules described above, if a partnership filed a tax return and paid its taxes in year 1 (the year 1 tax return), partner X sold its interest in the partnership to new partner Y in year 2, and the partnership was audited in year 3 in respect of its year 1 tax return, then partner Y would bear its share of any additional tax liability assessed on the partnership in year 3 in respect of the year 1 tax return, despite that partner X, and not partner Y, was a partner in the partnership in year 1.”

The article states one of the most important reason that operating agreement of all LLCs taxed as partnerships must be amended to deal with the new audit rules:

“Partnership and LLC agreements should generally be revised to provide for who will act as the ‘partnership representative’ because in the absence of an appointed person, the IRS has the discretion to pick a ‘partnership representative.’

By | 2016-12-13T21:20:06+00:00 March 7th, 2016|Categories: Partnership Tax|0 Comments

New Tax Audit Regime

Taft Stettinius & Hollister LLP, Todd C. Lady and Lourdes E. Perrino: “On Nov. 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the “Act”). The Act dramatically changes the way the IRS will conduct partnership audits going forward and, in turn, likely will have far reaching implications on how partnerships, including funds, conduct operations in the future. . . . Although these rules have not yet taken effect, they should be taken into account when drafting new operating agreements or engaging in acquisitive transactions involving partnerships. Operating agreements should include procedures that address the option to elect to pass any adjustment on to the reviewed-year partners. Additionally, partners should clearly define their respective rights to notice and participation during an audit and carefully select the partnership representative that will have the authority to bind the partnership.”

By | 2016-05-29T08:26:54+00:00 February 8th, 2016|Categories: Partnership Tax|0 Comments

New Partnership Audit Rules Require Careful Review of Partnership and LLC Agreements

Cozen O’Connor, Richard J. Silpe”If you are a partner of a partnership or a member of a limited liability company (LLC) taxed as a partnership, or are entering into a new partnership or LLC, you may have some important decisions to make in light of impending changes to the rules governing federal tax audits. . . . These new rules will lead to new provisions in partnership and LLC agreements and amendments of existing agreements to, among other things, designate a method for selecting a partnership representative and its rights and obligations of the partners, address whether certain tax elections will be made, and provide for indemnification and other contractual provisions (e.g., in the case of a withdrawing partner).

By | 2016-05-29T10:33:22+00:00 January 26th, 2016|Categories: Partnership Tax|0 Comments

Comprehensive Partnership Audit Reform Requires Amending LLC Operating) Agreements

Kilpatrick Townsend & Stockton LLP, James E. Brown, Heather L. Preston, Lynn E. Fowler and Charles E. Hodges II “Congress has recently scrapped the existing procedures for IRS audits of partnerships. The new rules (the “BBA Audit Rules”1) are effective for partnership taxable years beginning on or after January 1, 2018. A partnership that fails to address key concepts of the BBA Audit Rules could make a partner indirectly liable for federal income tax of the partners assessed for a year prior to becoming a partner. Almost all partnership (and LLC operating) agreements will need to be amended at a minimum to clarify which partners will be liable with respect to audit adjustments asserted by the IRS.”

By | 2016-05-29T10:26:29+00:00 December 22nd, 2015|Categories: Partnership Tax|0 Comments

New Audit Rules Require Changes to Partnership and LLC Operating Agreements

Holland & Knight LLP, William B. Sherman and Daniel L. Janovitz: “The Bipartisan Budget Act of 2015 (P.L. 114-74) includes a complete overhaul of the procedures that apply to Internal Revenue Service (IRS) audits of partnerships, including limited liability companies (LLCs) taxed as partnerships and their partners. . . . . Issues that Partnerships Need to Address . . . . 1. Existing partnership and LLC operating agreements should be reviewed, and amendments will need to be drafted to address aspects of the new rules, including:

  • designating the partnership representative in place of the TMP
  • determining the partner(s) that will control the decision to opt out of the new regime
  • preventing assignments of partner interests to persons that would preclude the ability to opt-out
  • addressing the payment of entity-level tax
  • committing to making certain elections in the event of an audit adjustment
  • addressing circumstances where partners agree to “adjusted information returns” in lieu of entity-level tax

2. Negotiations will be necessary to determine the appropriate partnership representative and the contractual limitations on the authority of such representative.

By | 2016-12-13T21:20:06+00:00 December 21st, 2015|Categories: Partnership Tax|0 Comments

New Partnership Tax Audit Rules Require Changes to Operating Agreements

Dykema Gossett PLLC, Jeffrey A. Goldman, Steven E. Grob, Anthony Ilardi, Jr., William C. Lentine and Robert W. Nelson: “On November 2, President Obama signed the Bipartisan Budget Act of 2015 (the “Act”), which significantly changes the procedures for tax audits of partnerships. . . . The sweeping changes in the realm of partnership tax audits will likely require revisions to most partnership agreements and new considerations when entering or leaving a partnership.”

See the end of the article for a list of changes to make to operating agreements and partnership agreements.

By | 2017-06-24T15:16:46+00:00 December 18th, 2015|Categories: Partnership Tax|0 Comments

New Audit Procedures for Partnerships Create Potential Entity-Level Liabilities

Venable LLP, Brian J. O’Connor, Norman Lencz, Michael A. Bloom and Christopher S. Davidson:  “On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the Act). The Act significantly changes how partnerships (including LLCs taxed as partnerships) are audited by the IRS. . . . As a result of changes made to the Internal Revenue Code by the Act, partnerships may now be directly liable for any tax deficiency resulting from an adjustment to partnership items (e.g., income, gain, loss deduction and/or credit). Thus, the current partners in a partnership could bear economic responsibility for improper tax reporting in prior years, even if one or more of such partners was not a partner in the year in which the improper reporting occurred.”

This article includes the following statement:

“existing partnership agreements should be reviewed to account for these new audit procedures”

I agree.  I recommend without exception that all existing LLCs taxed as partnerships amend their Operating Agreements to cover the issues created by the Bipartisan Budget Act of 2015.  LLCs that are taxed as partnerships that do not have an Operating Agreement should adopt an Operating Agreement that contains language that deals with the issues created by the BBA.

 

By | 2017-06-24T15:21:57+00:00 December 17th, 2015|Categories: Bipartisan Budget Act, Partnership Tax|0 Comments

Bipartisan Budget Act of 2015 Introduces New Partnership IRS Audit Rules

Akerman LLP, Donald K. Duffy:  “Effective for partnership tax years beginning after 2017, the Bipartisan Budget Act of 2015 repealed the current partnership audit rules and replaced them with rules described in general terms below. Partnerships can also elect to apply the new rules sooner to partnership tax years beginning after the date of the Act’s enactment. In brief, the major change is that the partnership itself can be liable for federal income tax in the tax year the audit adjustments become final. The partners in that year bear the economic burden of the tax and not the partners in the earlier tax year under audit and with respect to which the adjustments are made. Since partnerships can elect to apply these new rules earlier than 2018, some extra diligence is needed now in the acquisition of partnership and LLC interests.”

This article lists eight partnership tax issues that should be addressed in partnership agreements and operating agreements of LLCs taxed as partnerships.  Bottom line:  If your existing or new LLC is or will be taxed as a partnership it must have an operating agreement that includes language that addresses the issues created by the Bipartisan Budget Act of 2015.

By | 2016-05-29T07:25:04+00:00 December 4th, 2015|Categories: Partnership Tax|0 Comments

Budget Act Creates New Partnership Tax Audit Regime

Drinker Biddle & Reath LLP, Stephen D.D. Hamilton, David Shechtman and Jonathan D. Grossberg: “Although the new rules under the Budget Act will first apply to returns filed during 2019 ( i.e., for a partnership’s 2018 taxable year), partnerships and their advisors need to plan now for these eventual changes. Anyone entering into a new partnership agreement or acquiring an interest in an existing partnership should focus on what tax audit rights, and what tax representations and covenants, to seek. Partners of “small partnerships” should consider whether to bind themselves to the election-out procedures and whether to adopt transfer restrictions that will insure that the election-out remains available. Existing partnerships should begin consideration of the procedures for designating the PR and whether to utilize the alternative regime for allocation of assessed tax liability back to the partners in the Audit Year.”

By | 2016-05-29T08:41:50+00:00 November 30th, 2015|Categories: Partnership Tax|0 Comments

Partnership Audit Reform: New Partnership-level Tax Impacts Partnerships & LLCs

Kaye Scholer LLP, David A. Sausen, Willys H. Schneider and Zeno Houston:  “The Bipartisan Budget Act of 2015 (the Budget Act), which was signed into law on November 2, 2015, has dramatically reformed how the U.S. Internal Revenue Service (IRS) will assess and collect taxes from partnerships, including limited liability companies (LLCs) treated as partnerships for tax purposes. . . . Accordingly, absent the exercise of an election as described below, the New Audit Rules can result in the imposition of an entity-level tax on the partnership as a result of audit adjustments. This heralds a significant change from the existing partnership audit procedures”

The authors state:

All partnerships will need to consider appropriate revisions to existing partnership agreements—preferably, long in advance of the Effective Date

By | 2016-05-29T08:16:24+00:00 November 20th, 2015|Categories: Partnership Tax|0 Comments

New Tax Audit Rules: a Big Deal for LLCs Taxed as Partnerships

Shearman & Sterling LLP, David S. Raab, Julie M. Marion and Thomas H. Halpern: “Existing partnerships should review operating agreements before new rules take effect.  The Bipartisan Budget Act of 2015 (the Act), which President Obama signed on November 2, upends the way the Internal Revenue Service (IRS) conducts partnership audits, with potentially far-reaching effects. . . . Small partnerships will have to decide whether they want to elect out of the new regime, thereby weakening the ability to control consistent partner reporting.  Partnerships that do not elect out or that are ineligible to elect out will need to ensure their operating agreements address the new procedural requirements, such as addressing whether the partnership is required to elect to pass-through audit adjustments to the partners or who will have the authority to make that decision.

By | 2016-05-29T10:01:31+00:00 November 9th, 2015|Categories: Partnership Tax|0 Comments

Partnership Audit Reform Passed into Law

Ropes & Gray LLP:  “On Monday, November 2, President Obama signed the Bipartisan Budget Act of 2015 (the “BBA”) into law, effecting sweeping changes to the rules governing audits of entities treated as partnerships for U.S. federal income tax purposes. The new rules can be expected to increase partnership audit rates by making audits and related tax assessments more efficient for the IRS, including by imposing an entity-level tax on the partnership on audit adjustments, absent an election (described below) to shift tax liability to partners. The new rules constitute a stark change from existing law

The authors said the partners of a partnership and the members of an LLC taxed as a partnership should take the following action:

“Revision of partnership agreement provisions addressing the sharing among the partners of any partnership-level tax and related items.”

The authors described six other issues that partnerships and LLCs taxed as partnerships must consider.

By | 2016-12-13T21:20:06+00:00 November 9th, 2015|Categories: Partnership Tax|0 Comments

New Partnership Audit Rules Radically Alters Federal Partnership Income Tax

Sutherland Asbill & Brennan LLP, Thomas A. Cullinan, Sheldon M. Kay , Daniel R. McKeithen, David A. Roby, Jr., Amish M. Shah and H. Karl Zeswitz: “On November 2, 2015, President Obama signed the Budget Act of 2015 (the “2015 Budget Act”), which makes significant amendments to the procedural rules governing federal income tax audits and judicial proceedings that apply to partnerships and other entities (such as limited liability companies or statutory trusts) classified as partnerships for federal income tax purposes. . . . existing partnerships and their partners will also need to consider the extent to which the new rules will necessitate amendments to their partnership agreements to preserve their existing arrangements.”

By | 2016-05-29T10:17:30+00:00 November 5th, 2015|Categories: Partnership Tax|0 Comments

Bipartisan Budget Act of 2015 Revamps Partnership Tax Audit and Collection Procedures

Debevoise & Plimpton LLP, Adele M. Karig, Vadim Mahmoudov, Peter F.G. Schuur, Rafael Kariyev and Matthew D. Saronson:  “The Bipartisan Budget Act of 2015 signed by President Obama yesterday substantially changes how the IRS makes tax audit adjustments to partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. The changes are intended to enhance the IRS’s ability to audit partnership tax returns, and to enable the IRS to collect taxes, interest and penalties that flow from a partnership tax audit adjustment directly from the affected partnership. . . . The new partnership tax audit rules, which will apply to tax returns of partnerships for tax years beginning after 2017, provide that any tax adjustments resulting from IRS audits of partnerships generally will be determined and collected at the partnership level, even though partnerships are not subject to income taxes and the partners are the relevant taxpayers.

By | 2016-05-28T20:40:34+00:00 November 3rd, 2015|Categories: Bipartisan Budget Act, Partnership Tax|0 Comments