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Wednesday, February 6, 2019

As Printed in the Daily Business Review: What Partners Need to Know to Protect Themselves Under The New IRS Partnership Audit Procedures

By: Alyssa Razook Wan, Esq.

As printed in the Daily Business Review on February 6th, 2019.


The procedures by which the Internal Revenue Service ("IRS") will audit partnership returns have been thoroughly overhauled, and these changes have important substantive consequences to partners. In order for partners to protect their interests, it is critical to understand the new procedures, consider electing out if eligible, and revise governance documents in order to provide processes that would apply in the event of an audit.

In general, the IRS will assess and collect tax at the partnership level effective for tax years beginning after December 31, 2017. The new procedures apply to partnerships and other entities taxed as partnerships, such as multi-member limited liability companies. A few key aspects are discussed below.

1. Partnership Representative Has Sole Authority. The "tax matters partner" has become the "partnership representative" ("PR"). The PR may be an individual or an entity, but if it is an entity, a designated individual must be appointed. The PR must be designated annually  on the partnership tax return, and the IRS may designate a PR if the IRS determines that a designation of PR is not in effect.

The PR has the sole authority to act on behalf of the partnership during an audit, and all partners and the partnership will be bound by such actions taken by the PR. Partners will have no statutory right to participate in the audit without the permission of the IRS. There is no requirement that the IRS notify the other partners of audit communications.

The PR must have "substantial presence" in the United States, which is defined as (i) making oneself available to the IRS, and (ii) having a U.S. tax identification number ("TIN"), a U.S. address and telephone number.

2. Current Partners Bear Liability…and the "Push Out" Election. In general, any adjustment to a partnership related item, and any tax, interest and penalty attributable thereto, is determined at the partnership level. This means that the partners at the time the final adjustment is made bear the economic burden of such adjustment in proportion to their respective interests in the partnership at that time, even if those partners were not partners in the year to which the audit relates or previously owned a lesser or greater interest in the partnership. 

However, even where the new audit procedures apply, the PR may make what is referred to as a "push-out" election. If such election is made, each of the "reviewed year partners," that is, those partners for the tax year under audit review, will separately take into account their own share of the partnership adjustments, and the partnership will not be liable for the imputed underpayment. 

3. Election Out. Certain smaller partnerships may elect out of the new procedures. In order to qualify for electing out, (i) a partnership must have 100 or fewer partners during the year, as defined by the Internal Revenue Code and Treasury Regulations, and (ii) all partners must be "eligible" partners (which are individuals, C corporations, foreign entities per se or taxable as C corporations, S corporations, or estates of a deceased partner). Therefore, the election is unavailable where there is a partner that is a trust, partnership, disregarded entity or a foreign entity that is not taxed as a C corporation. 

The election is available annually by timely filing (including extensions) IRS Form 1065 and providing all information required by the IRS about each partner, including each partner's name, TIN (or alternative identification permitted by the IRS) and Federal tax classification.

If the election is made, the IRS will make adjustments against all partners in separate partner-level proceedings. Partners should confirm they will have sufficient access to the partnership's books and records in the event they need to substantiate amounts allocated by the partnership in an IRS audit.


As a result of these changes, it is advisable for partners to revise existing governance documents. A PR's failure to follow governance documents will not diminish its authority as to the IRS, but may provide a basis for a claim by the other partners under state law. Below are some issues to be considered:

1.   Designation and removal of the PR, and, as applicable, the designated individual of such entity.

2.   Mechanism for electing out of the new audit procedures, including how notice that the election has been made is to be given to the partners.

3.   Requirement that PR provide notice and regular reports of audit proceedings and obtain partner consent for accepting or rejecting a settlement or making the "push-out"election.

4.   Indemnification of the PR in executing partner-approved decisions.

5. Those considering purchasing an interest in a partnership should perform careful due diligence and seek indemnification for any unpaid tax liabilities, known or unknown, for prior years and seek to require that the partnership elect out of the new procedures if possible, or not possible, that the PR make the push-out election for years that may come under audit before the purchase occurred.  


Alyssa Razook Wan is an associate in the TaxInternational and Trust & Estates practice groups at Fowler White Burnett. She may be reached at

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