Due to recent changes to the Tax Equity and Fiscal Responsibility Act of 1982, federal audits of business partnerships are expected to rise significantly. Because of sophisticated tiered structures of many partnerships, it had become difficult if not impossible for the IRS to conduct an effective audit. The new rules are expected to change all of that, but with the new audits, you do have options. Here’s what you need to know.

The K-1 Adjustments Option

The schedule K-1 form is used for each partner to report their share of income, deductions, and credits from their portion of the partnership. Under new rules, a business partnership may opt to issue adjustment K-1s to the partners for the year that is being audited, which is what was required in the past. For the year being reviewed, the partners will have to recalculate their tax liability under what the IRS calls a “simplified amended return process.”

Pay the Tax at the Partnership Level Option

The partnership can elect to pay the taxes due based on the audit’s findings at the partnership level. This would eliminate the need for amending all partners’ returns but will require the partnership to pay the tax.

Agreements in Place? Check With Your Attorney

If you have operating agreements in place, they may be impacted by the new rules. Make sure you include language in the agreements to leave it open for the partnership to make decisions about its options in case of an audit. You should consult your attorneys and review your operating agreements to make sure they are clear for any new audit or tax partner.

New Options for Designated Partnership Representatives

In previous years, your business had to have an official partner be the representative to be the liaison with the IRS during an audit. Now, you may designate anyone from the company to be your partnership representative who is empowered to bind the partners to the audit results. The representative will also be responsible for making certain decisions related to the audit, such as various elections and opt-outs.

New Partners On the Hook for Liabilities of Previous Partners

If there were previous partners that underpaid their tax liability, then new partners will be responsible for both the underpaid tax and interest and penalties — even if they were not partners when the underpayment occurred. 

Need to Know More About Tax Liability for Your Partnership?

Need help estimating your expected tax liability for your partnership, meeting required deadlines, and devising ways to reduce your tax bill in 2017 and beyond? PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.