Partnership Representatives & Audits

by Mike Cieri, CPA

Starting with the 2018 tax year, the IRS has changed the way it audits partnerships. As a result, partnerships have some important choices to make.

Partnership Representatives

Current tax rules require every partnership that files a tax return to name a representative. This person will be the IRS contact in case of an audit. 

Your partnership should update its governing documents to name that representative.  And you should let your accountant know who it is, so that person can be identified on the partnership tax return.

The representative does not need to be a partner. You could name your accountant, lawyer, an executive or other trusted person. In the event of an audit, the partnership representative could, in turn, delegate someone to advocate for the partnership.

Taxation at Partnership Level

Under prior law, if the IRS audited a partnership and, as a result, increased its income, the IRS would collect any tax due from each partner. Under the new rules, by default, the IRS will assess any tax or penalty at the partnership level. The partnership – not the partners – will pay any balance due at the highest individual tax rate, currently 37%.

This might not be a great outcome for the partners if, for example, they were in a lower tax bracket than 37% or if the current set of partners is different than the set from the year under examination. On the other hand, having one experience with the IRS and settling matters might be better than having the IRS deal with each partner individually. 

Small partnerships of 100 partners or fewer whose partners are either individuals or corporations may opt out of this treatment. They can choose examination under the old system, where the IRS would audit and potentially assess tax at the partner level. A partnership that opts out of the new audit procedure need not identify a partnership representative for that year.

Questions? Talk to us. John Schachter + Associates serves many partnerships as partnership representative. And we can help you decide if an opt-out election is right for your partnership.