Presented By: Anchin
Partnership Agreements and LLC Operating Agreements Need to Be Amended Now!
Effective Jan. 1, 2018, the IRS changed its audit rules as they relate to any entity taxed as a partnership.
Under the new rules, the concept of Tax Matters Partner (TMP) no longer exists. The IRS has created a Partnership Representative (PR).
A PR does not need to be a partner or member of the entity and can be anyone the entity chooses, as long as the individual has a substantial presence in the U.S. and the capacity to act on behalf of the partnership. If an entity is chosen as the PR, the partnership must choose an individual with a substantial U.S. presence to act on behalf of such entity and therefore the partnership.
Many, if not most, partnerships will be subject to the new audit rules. Possible exceptions may include instances where the partnership only has individuals, C-Corporations, eligible foreign entities, S-Corporations or an estate (only for 2 years) as its partners and has fewer than 100 partners. When counting the number of partners, if the partnership has an S-Corporation as a partner, then the S-Corporation counts as 1 partner, and the number of shareholders it has counts as additional partners. Should a shareholder of the S-Corporation not be an individual then the partnership will be subject to the new audit rules.
“This change should inspire substantial review and revision to partnership agreements,” says Marc Wieder, Partner and Real Estate Group co-Leader at Anchin, Block & Anchin LLP. “It applies to partnerships as well as LLCs that are taxed as partnerships.”
What are the new audit rules?
The key and most important change is that now the PR will bind the partnership when agreeing to any settlement of adjustment with the IRS. No longer will the IRS deal with multiple individual partners. In addition, any adjustment the IRS makes is an adjustment to the partnership and is the partnership’s liability and obligation to make the payment.
Things to consider when amending your agreements:
- Selection and replacement of your PR
- Indemnification of the PR
- Scope of PR’s authority
- How to deal with former partners that were partners in the year under audit
“There are clearly many factors to consider when selecting the PR,” Wieder explains. “Since the PR can bind all partners, some factors could include which partner has the largest holdings (and thus the most incentive to try to settle for as little as possible) or has the best understanding of tax law.” Whether choosing a partner or an outside advisor, it is likely that the new PR will want to include some provisions in the partnership agreement to indemnify them in the event that other partners are dissatisfied. The other partners may also want to revise the partnership agreement to require that a process be carried out, such as a meeting of the partners, in the event of a challenge from the IRS.
While this serves as an overview of the changes, it is best to consult with your accountant and attorney to determine all the decisions and amendments that need to be made to your agreement. Do not wait!