There are new IRS rules applicable to audits of partnerships, limited partnerships (LPs) and limited liability companies (LLCs), effective January 1, 2018. These new audit rules are important because they heighten potential liabilities of individual partners and LLC members, including exposing new and current participants in partnerships and LLCs to the tax liabilities of former participants. Because LPs and LLCs are popular forms of business entities, especially for investment, new business ventures and real estate development, the new audit rules are significant.
Among the new regulations:
- Current partners/members may be liable for tax liabilities of former partners/members who left the LP/LLC.
- IRS assessments apply in the current year of the audit/assessment and not the prior year(s) under review.
- IRS assessments and tax liabilities may apply at the partnership level, rather than at the partner/member lever (which means that a partner’s or member’s individual losses/deductions may not reduce the assessment/liability).
- Incoming partners/members may face heightened exposure for years and events where the new partner was not even associated with the LP/LLC.
Pre-existing partnerships and LLCs should address these new IRS rules with counsel and determine whether the partnership and LLC organizational agreements properly take into account the audit changes. New partnerships and LLCs should be formed cognizant of the new rules. In certain cases, proper drafting or revision of the operative documents may be required to respond to the new rules and protect the partners and LLC members. As an example, new investors should be properly indemnified for any negative audits or assessments for tax matters in the past. In addition, partnership and LLC agreements may allocate tax liability to former partners and LLC members.
We would be pleased to review your partnership and LLC operating documents in order to respond to the new IRS rules as well as properly protect the individual investors in the partnerships and LLCs.