For the 2018 tax filing year, there are new Internal Revenue Service (IRS) partnership audit rules [also adopted by the California Franchise Tax Board (FTB)] in which the partnership, not its members, will now be responsible for tax adjustments under audit.
There is a very narrowly defined opt-out provision that many partnerships do not qualify for. Please consider amending the partnership operating agreement to designate a “partnership representative” to represent the company in disputes with the IRS or the FTB. Also, you should consider including language regarding the responsibility of tax audit adjustments pursuant to the three allowable methods: “amend”, “pull in”, and “push out.”
Below is a chart which discusses the advantages and disadvantages of each method.
|Election Out||Partnership out of CPAR||Limited to small partnerships with limited kinds of partners
Must elect on annual basis
|Amend||Simple to implement||Partnership can’t compel partners to amend
Partnership can’t monitor who amends and who doesn’t
|Pull In||Simple to implement
Partnership can act as clearing house for convenience of partners (allows partnership to monitor which partners have pulled in)
|Partnership can’t compel partners to pull in|
|Push Out||Partnership can compel reviewed-year partners to pay tax on their share of imputed underpayment||Short time frame to elect and comply
Large administrative burdern on partnership
Partners pay additional 2% penalty
To discuss your situation under the new partnership audit rules, please contact a WFY tax expert at (949) 910-2727 or firstname.lastname@example.org
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