In 2015, Congress in its infinite wisdom changed the rules on how audits of partnerships (and multi-member LLCs) were to be conducted beginning on January 1, 2018. Before the change, a tax matters partner (or member) handled an audit of partnership tax returns, but the tax matters partner couldn’t do a whole lot except for being a representative for the partnership – all of the partners received information from the IRS and were part of the decision-making process on resolving / settling an audit.
Beginning January 1, 2018, the tax matters partner will be replaced by a “partnership representative” (who may or may not be an actual partner of the partnership) whose authority to deal with the IRS was expanded significantly. Not only does the partnership representative work almost exclusively with the IRS during the audit process, but can bind the partnership and all of the partners on any position and decision taken. Without any limitations in the partnership / operating agreement about the partnership representative’s status and authority before the IRS, the partnership representative can make decisions to the tax benefit and/or detriment to any one or more partners in the partnership – OUCH!!
It is possible to “opt-out” of these rules by filing particular exception applications with the IRS, but that may result in more harm than good because they may put the audit spotlight on the partnership and increase the level of scrutiny that the IRS applies on any future audit.
So, care must be taken in choosing a partnership representative to act on behalf of the partnership or multi-member LLC. Pick a person who everyone trusts to act in everyone’s best interest and not solely for themselves. And, make sure that the partnership or operating agreement contains enough safeguards to limit the partnership representative’s authority to negotiate and bind the entity in an audit. So, please refer to the following article for more information on this topic and contact my office at 360-292-4556 to schedule an appointment to update your partnership and operating agreements to properly plan for the changes in 2018.