New IRS rules aimed at partnership audits

Maryland businesses that operate as partnerships or as limited liability companies will face new IRS rules starting with all tax years commencing on or after Jan. 1, 2018. In some cases, this may require changes to an existing partnership or member agreement. It may also require partners to communicate better in general to avoid potential consequences. One of the goals of the new auditing rules is to simplify the role of the IRS in conducting audits as well as to level the playing field between corporations and large partnerships.

Less than 1 percent of 2012 taxable year returns filed by a large partnership were audited. In that same year, more than 27 percent of traditional corporate returns were audited. Furthermore, two out of three large partnership audits concluded with no changes being made. Of C corporation returns audited, only about 25 percent resulted in no change to a return.

All partnerships will be governed by the same auditing rules starting in 2018, but some may be able to opt out of the rules. Among other rule changes, if the government determines that a partnership is entitled to a refund as the result of an examination, it can be used as an income adjustment on the next year's tax return. A partnership representative must be named who will act as the sole person the IRS has contact with during an examination.

Companies have rights and protections when dealing with the IRS. Among these rights may be the ability to question whether any assessed tax balance has been calculated properly or calculated using appropriate information. If a partnership is audited by the IRS, it may be appropriate for it to have an attorney provide guidance during the examination process and negotiate with the IRS on the partnership's behalf.

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