New IRS Audit Rules To Impact Partnerships (LLCs) In 2018

Haynsworth Sinkler Boyd, P.A.

For tax years beginning after December 31, 2017, a new centralized audit regime for partnerships and LLCs will take effect. Currently, audit adjustments made by the Internal Revenue Service for partnerships (LLCs) are made at the individual partner (member) level with assessment and collection at the individual partner (member) level.

Under the new regime, audit adjustments made by the Internal Revenue Service will be determined at the partnership (LLC) level and with some limited exceptions, the assessment and collection of the tax will also be made at the partnership (LLC) level, rather than at the partner level. 

Partners and members who were partners (members) in the tax year under review may elect to “push out” the tax liability to themselves rather than to the partnership (LLC). The toll charge for making the push out election is an additional 2% interest charge imposed on the tax deficiency. 

Certain small partnerships (LLCs) issuing less than 100 K-1s per year and having only partners (members) who are individuals, C or S Corporations or estates of deceased partners (members) may annually elect out of the centralized audit regime. However, small partnerships whose partners (members) are partnerships, LLCs (even single member LLCs and other disregarded entities) or trusts, may not elect out of the centralized audit regime. 

These new rules will have a profound impact on the partnerships (LLCs) and their partners or members and some partnership agreements (operating agreements) will need to be amended to deal with these new rules.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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