Risk & Business Magazine General Insurance Services Magazine | Page 25

AUDIT RULES New Partnership Audit Rules Take Effect P artnerships: take note! There are new procedures in place for filing your 2018 tax returns. With the rising number of large partnerships, the IRS has had difficulty assessing taxes from partnership audits in certain situations. As a result, it has adopted new rules that will allow the agency to assess and collect taxes and make adjustments strictly at the partnership level. This change will have important implications for partnerships, and in most cases, will require amendments to the partnership agreement. Beginning with the 2018 tax year, the “tax matters partner” has been replaced with the “partnership representative,” who will have the sole authority to act on behalf of the partnership for the purposes of an audit. Although this individual does not necessarily need to be a partner, he or she will have broad responsibility to act on behalf of the partnership in any federal tax audit or related judicial tax proceeding. With this change, liability will now be imposed at the partnership level rather than the partner level, and the highest tax rate in effect for the year under audit—for example, 37 percent for the 2018 tax year— will be used in assessing tax. UNDER THE NEW RULES, LIABILITY IS IMPOSED IN THE YEAR OF AN ADJUSTMENT RATHER THAN THE YEAR TO WHICH AN ADJUSTMENT RELATES. THIS MEANS THAT NEW PARTNERS MAY BEAR THE BURDEN OF AN AUDIT ASSESSMENT MADE FOR A YEAR PRIOR TO THEM EVEN BECOMING PARTNERS. HOWEVER, SPECIAL RULES MAY PERMIT MODIFICATIONS TO THE ASSESSMENT, INCLUDING ALLOCATION OF ADJUSTMENTS TO PARTNERS DURING PRIOR YEARS. Partnerships with 100 or fewer partners may be eligible for an annual election to opt-out of the partnership-level audit proceedings. To qualify, each partner must be one of the following: Individual, S Corporation, C Corporation, foreign corporation, or estate of a deceased partner. The election cannot be made if any partner BY: DIANE WILCZEWSKI TAX MANAGER, ROWLEY AND COMPANY is one of the following types of entity: partnership, trust, or single-member LLC. The opt-out statement must be made annually with a timely filed (including extension) partnership return. Despite the overarching goal of facilitating the IRS audit process, in the short term, these new rules introduce fundamental changes to how taxes are assessed and collected during a partnership audit and may raise important questions for your business. To learn more about how these changes will affect your partnership, contact Rowley & Company at 219-874-1437 or visit www.rowleyandco.com. + Diane Wilczewski is a Tax Manager at Rowley & Company with over 25 years of experience in public accounting in several states. She is a New York-licensed CPA with a specialty in taxation and planning. The mother of four children, Diane actively participates in several community organizations and is Executive Director of the La Porte Meals on Wheels. She is on the Board of Directors of the New Human Research & Development Institute, a group studying higher brain function, and Voices of Variety, a group that encourages creative expression. 25