Important Tax Audit Provisions Going into Effect January 1, 2018

01.01.2018

BY: Andrew M. Bechel, Esq. and Gregory M. Janssen, Esq.

On January 1, 2018, new audit rules are going into effect that will impact the audit process for partnerships, including most multi-member limited liability companies.

The new audit provisions are not impacted by the recently passed tax reform bill. These new rules will drastically change how the IRS conducts audits of limited liability companies and will allow it to audit significantly more companies in any given year, thus increasing the audit risk associated with operating as a multi-member limited liability company.

The new audit provisions make two significant changes that multi-member limited liability companies will need to address:

1) The company itself, NOT the individual members, will now be liable for any tax adjustments made by the IRS during an audit. These adjustments will be calculated using the highest individual tax rate (39.6% as of the time of this writing) even if the company’s members are individually taxed at a lower rate, thus potentially increasing the overall tax burden to the company’s members. Additionally, because the company will be liable for the tax adjustments rather than the members, the tax burden for audit adjustments is shifted to current year members, even if they were not members in the year under audit, unless the company specifically addresses this issue in its operating agreement.

2) The company will now be represented before the IRS by a “partnership representative,” which replaces the “tax matters partner.” The partnership representative’s duties and powers are significantly expanded because, unlike the tax matters partner, the partnership representative will have the sole authority to bind the company, and its members, during an audit. Without specific limits in the company’s operating agreement, the manager and members will have no rights to participate in the audit and will only have limited powers to control the partnership representative. Furthermore, if the company does not properly select a partnership representative, the IRS will designate a representative for the company.

These changes are significant and will need to be addressed in each multi-member limited liability company’s operating agreement. Presently, the IRS has not issued final regulations to implement the new audit regime. As soon as the final regulations have been issued, we will be reaching out to our clients concerning the necessary changes that need to be made to their operating agreements to adequately address these new rules. In the interim, if you have any questions concerning the new audit procedures, please feel free to contact us.

Learn More about our Tax & Private Client Services.

Related People: 
Andrew M. Bechel
Andrewb1
Contact information: 
303.534.9358
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Gregory M. Janssen
GJanssen1
Contact information: 
303.534.9353
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