On November 2, 2015 the Bipartisan Budget Act of 2015 (the “Act”) was signed into law by President Barrack Obama, which will significantly affect the audit rules for entities treated as partnerships for federal income tax purposes. The Act completely repealed and replaced the TEFRA audit regime for tax years beginning December 31, 2017. The new regime will apply to all entities taxed as partnerships except those that are eligible to “opt out” and affirmatively do so. Under the new rules, the IRS will make adjustments at the entity level and impose any tax resulting from a deficiency on the partnership rather than on the individual partners. The economic responsibility for prior years reporting could, as a result, fall on all current partners of the partnership even though one or more of the partners was not a partner at the time of the improper reporting.

To opt out of the new regime, partnerships comprised of less than one hundred individuals, certain corporations, and other entities must make the election annually with the partnership’s return, and the partnership and individual partners would then be audited under the IRS’ general individual rules.

Among other important changes, the Act replaced the “tax matters partner” with a new “partnership representative,” who now does not have to be a partner of the partnership. The new partnership representative will be responsible for acting on behalf of the partnership during audit proceedings and will have the sole authority to bind the partnership as well as the partners through its acts during the audit. Individual partners will not have to be notified of audit proceedings or adjustments and all partners will be bound to any determination made at the entity level.

The changes made by the Act will have significant impact on existing partnerships as well as mergers and acquisitions. For instance, the current partnership agreement may not address the tax elections that will need to be made under the Act, or address the rights and obligations of the partners becoming partners after the reporting year. In addition, the partnership agreement should further address how the partnership representative is selected and if that representative will be required to report audits to the partners when the IRS would have no duty to do so.

If you are a member of a partnership, whether general or limited, or any other entity being taxed as a partnership, consider reviewing the applicable partnership agreement. To ensure the partnership has appropriately planned for the upcoming IRS audit changes, you need to seek the services of an experienced lawyer to help you understand the new law Michael Leonard, Esq. of San Diego Corporate Law can assist you with those endeavors. To schedule a consultation with Mr. Leonard to discuss your whether your partnership agreement needs to be updated, whether the new rules apply to your partnership, or to discuss any other business-related matter, you can contact him by visiting San Diego Corporate Law or by telephone at (858) 483-9200.