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Wiley Rein Tax Lawyer Michael Grace Comments on Updating Partnership Agreements for New Tax Auditing Rules

Bloomberg BNA’s Daily Tax Report
April 30, 2018

On April 30, 2018, Bloomberg BNA’s Daily Tax Report quoted Michael J. Grace, consulting counsel in Wiley Rein’s Tax and Corporate practices, about “What to Ask When Updating a Partnership Agreement for Audit Change.”

The Bipartisan Budget Act of 2015 significantly changed how the IRS may audit partnerships (including most limited liability companies) and collect any resulting tax deficiencies. Before the change, a “tax matters partner” represented the partnership in an IRS examination. Although the IRS could identify tax deficiencies at the partnership level, it then had to try to collect them from the partners themselves.

Under the new Centralized Partnership Audit Regime generally taking effect in 2018, a “partnership representative” will represent the partnership. The IRS not only may audit a partnership itself but, subject to some exceptions, also collect resulting tax deficiencies from the partnership itself.

Mr. Grace commented to Bloomberg BNA on the need to amend partnership agreements to reflect these changes in the auditing rules. “Getting partnerships to focus on these issues and pay to amend an existing agreement often times can prove an uphill battle,” Mr. Grace told Bloomberg BNA. However, he urged that partnerships should not wait until the IRS decides to audit them to amend their agreements.

Mr. Grace also urged that a partnership agreement address whether the partnership when eligible will opt out of the new auditing regime. Some partnerships, Mr. Grace said, will opt out if they’re eligible no matter what, while other partnerships may approach the issue of opting out in a more nuisanced way. Those partnerships, Mr. Grace observed, may choose to amend their agreements to prescribe a process under which the partnership will decide whether to opt out taking into account specified considerations. 

Commenting on the responsibilities of partnership representatives, Mr. Grace suggested that an amended agreement clearly spell out which decisions the representative should make, which decisions require consent from the other partners or a committee of partners, and how to go about getting that consent.