Will there be greater IRS scrutiny of those who opt
out?
Yes, as the IRS has posted on their website:
“To ensure that the election out rules are not used solely to
frustrate IRS compliance efforts, the IRS intends to carefully
review a partnership’s decision to elect out of the Centralized
Partnership Audit Regime. This review will include analyzing
whether the partnership has correctly identified all of its
partners for federal income tax purposes notwithstanding who
the partnership reports as its partners. For instance, the IRS
will be reviewing the partnership’s partners to confirm that the
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When do the new rules
take effect?
partners are not nominees or agents for the beneficial owner.”
The new rules apply for tax
To stay compliant on the opt out, every year your CPA must years beginning January 1,
provide the IRS with the name and tax ID of each partner. If they 2018. LLC Operating
forget to do so you are under the new rules (without an appointed Agreements and LP Limited
Partnership Representative). The IRS scrutiny and Partnership Agreements
consequences of a simple error are not worth the supposed should be amended before
benefits of opting out. that date.
What if a Partner owes money for year 2020 but is
no longer a partner after an audit in year 2022? What should I do
now?
A very good question. In many cases, the LLC or LP will pay the You should work with your
tax and assess the partners. What if a year 2020 partner is long attorney to amend your
gone? We have included language in the amended documents documents. You should
which allows a general partner/manager to go after former discuss with your CPA that
partners. you are accepting the new
audit rules. Once your
We have also included language to identify who will be documents are amended all
responsible for prior year tax obligations upon a transfer of Members/Partners should
interest. But under the new rules there is a risk that current sign them in order for the
owners could be responsible for the taxes of former owners. transaction to be valid.
New IRS Rules for LLCs and LPs Taxed As Partnerships