CONSUMER ALERT--YOUR OPERATING AGREEMENT NEEDS TO BE REVIEWED02 / 01 / 2018
The Bipartisan Budget Act of 2015 replaced the TEFRA audit rules with a new streamlined set of audit rules. Many practitioners and partners or members may not know that eligible partnerships and LLCs (those having 100 or fewer partners and who do NOT have a partnership as a partner) can elect out of these rules so that if the IRS looks to audit, they would have to do that as against each partner.
It is imperative that practitioners and all LLCs, LLPs, LLLPs, limited partnerships, and general partnerships immediately review their operating or partnership agreements, to ensure that they are prepared to deal with these audit rules were they to apply at any time, were a "partnership" entity to become a member, or partner in what is otherwise a small partnership wanting to make an election out of these new rules. Any references to TEFRA's rules, such as to a "tax matters partner," is a sign that the operating or partnership agreement is out of date. The provisions governing how information is to be shared, the reporting of K-1s, and opportunities to participate and meet with any designated partnership representative are now extremely critical. This is because there are no longer opportunities for indirect partners to have the protections of due process to appear in any audit proceedings as a requirement under the audit rules themselves. This is because the new audit rules mandate that partnership entities designate either a partner or other person as the "Partnership Representative" who has the SOLE authority to act on behalf of the partnership entity in any IRS audit of the partnership. All partners, and the partnership entity, are bound by the actions taken by the designated Partnership Representative at any time during the audit, as well as final decisions reached in resolving the audit. If the representative is not selected by the entity, the IRS is allowed to select any person with a substantial presence in the United States to serve in this role. New IRC Section 6223(a).
The new audit rules still contain the same consistency requirements by which IRS Form 8082 is to be used to report an incorrectly issued Schedule K-1. Failing to file a Form 8082 creates a situation where the IRS is able to make a summary assessment (automatic), as if a mathematical or clerical error occurred, to mandate consistency between the Form 1065 and the reporting partners receiving a Schedule K-1.
At the Tufts Law Firm, PLLC, we are here to consult with you, conduct an immediate review of your operating documents, and advise and consult with you on what changes might be required to comply with the new audit rules. Practitioners and consumers and partners and members in partnership entitites need to closely monitor this area for developments as these new laws went into effect for all partnership entities treated as partnerships for Federal tax purposes for tax years after 2017, though partnership entities were allowed to elect to have these rules apply for partnership years beginning after November 2, 2015 under the BBA Section 1101.