Drafting Tips for New IRS Partnership Audit Rules

By C. Christopher Engel, Krieg DeVault LLP

The Bipartisan Budget Act of 2015 (the “Act”) changed the IRS partnership audit rules effective as of January 1, 2018. The partnership audit rules govern IRS audits of partnerships, including LLCs treated as partnerships for income tax purposes. Prior to January 1, 2018, the general rule was any taxes due as a result of a partnership audit by the IRS were imposed at the partner level, which meant that the partners during the year subject to the audit were responsible for any underpaid tax. However, under the new regime, instead of assessing an imputed tax underpayment amount at the partner level, the Act does so at the partnership level. This new system will make it easier for the IRS to audit partnerships, but it is a big change for clients and attorneys representing partnerships.

The practical impact for business lawyers is that the tax sections of partnership or operating agreements will need to be revised to comply with the Act. This article does a nice job laying out the changes made by the Act and gives practical tips to practitioners in drafting these provisions for agreements moving forward and for amendments to current agreements. Consultation with tax counsel and/or the client’s CPA firm is highly recommended.

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