When a partnership or an LLC filing as a partnership, files their Federal tax return, there is never any tax due at the entity level. Instead, all income, deductions, and credits flow proportionally to the partners on their respective Schedule K-1’s. As a result, if the IRS decided to audit a partnership tax return, taxes would be assessed against the individual taxpayers.
However, starting with 2018 tax returns, the IRS will audit some partnerships strictly on an entity level, and issue an assessment to the partnership, based on the highest effective Federal income tax rate in effect for that year. All partnerships that either have over 100 partners or another partnership as a partner would be subject to the new law as “large partnerships”. All other partnerships would also be subject to the new IRS audit rules, unless they elect out of being treated as a large partnership. This election would have to be done on an annual basis. Taxpayers have the option to apply the new IRS partnership audit rules for their 2016 or 2017 partnership tax returns.
As a result of the partnership, rather than the partners, being subject to the IRS assessment, the partnership agreement would have to be amended to require partners reimburse (or have their annual distributions reduced accordingly) their proportionate amount of any assessment, in case of an IRS audit.
If you are involved in a partnership that may be subject to these new IRS partnership audit rules, our firm can help you navigate through the long and complicated maze of IRS audit procedures. If you have any questions, please contact us.
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