The IRS is changing the way they audit partnerships and assess underpayment of tax beginning in 2018. Underpayment of tax and the assessment of penalty and interest will be assessed at the partnership level versus the individual partner level and the tax will be assessed at the highest partner tax rate. One Partner will need to be designated as the Partnership Representative to act as the point-person and decision maker regarding IRS audits and related matters. There will be some options to elect to opt out if certain criteria are met, but only in limited circumstances, such as the 6221 “Small Partnership” election, applicable to partnerships with 100 or fewer qualifying partners and a simplified ownership structure. This election would need to be made annually.
These changes will necessitate an amendment to your partnership/llc agreement. Provisions that should be considered include: Which Partner to appoint as the Representative, Indemnification considerations for the Representative, Communication requirements for the Representative to other Partners regarding IRS matters, and so forth. Partnerships will need to revisit this annually to determine if there is a change to whether they can opt out or not, and/or if a change needs to be made for naming a Representative.
If you need assistance determining whether your Partnership may opt-out, or have other questions regarding these new rules, please contact Bumpers & Company today (cpa@bumpersco.com or 302-798-3300). We can help you analyze your situation, so you can make an educated decision and point your partnership in the right direction.