The Bipartisan Budget Act of 2015 (BBA) included revisions on how the IRS audits partnerships. The new rules apply to partnerships as well as any LLC taxed as a partnership.

Under the new rules, partners no longer have a role to play in any audit or examination. They aren't even notified of the audit and won't be part of any defense during the examination. While the partnership itself will be notified of the audit, individual partners won't be informed.

Instead, the partnership selects a taxpayer representative. Partnerships must designate a representative on Form 1065 every tax year for that specific year. The individual selected as the representative has an important role to play in an audit and is in charge of making decisions during an audit. Given these responsibilities, representatives should be selected with care.

Any decisions the partnership representative makes are final, and the entire partnership is bound by that decision. For example, if a partnership representative agrees to settle the audit, other partners cannot later appeal the decision.

One way that partnerships can limit a representative's power is by creating contractual limitations in a partnership agreement or similar document. These agreements aren't binding on the IRS, but they can limit some of the taxpayer representative's power.

Opting Out of BBA Audits

Some small partnerships with fewer than one hundred partners can opt out of these audits. To do this, they must file Form 1065 on time and indicate they're opting out. They must include Schedule B-2, Form 1065, and include all partners' names. All partners must be eligible partners in order to opt out. Eligible partners are:

• Individuals
• C corporations
• Foreign entities that would be treated as C corporations if they were domestic
• S corporations
• Estates of deceased partners

The rules and regulations surrounding partnership audits can be confusing. Failing to follow them can lead to penalties and other issues.

For questions about how these audits will affect partnerships and how to prepare for them, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.