In 2018, new income tax rules will affect all entities taxed as partnerships which are being audited by the IRS. General and limited partnerships as well as LLCs or that are taxed as partnerships, will be subject to the new rules.
Rule for 2017 and prior: Upon audit, if the IRS concluded that a partnership under reported its income, the IRS could recover additional taxes from everyone who was a partner in the tax year for which the income was under-reported.
New 2018 Rules. Upon audit the IRS can assess a tax on the partnership itself, instead of chasing the individual partners. The partnership will pay tax at the highest tax rate for the wealthiest taxpayers, regardless of an individual partner’s tax bracket. If one or more partners are not in the highest tax bracket, the new rules would increase the overall tax being paid.
The partners who bear the additional tax burden are the partners for the year the IRS assesses the tax, not the partners for the year when the additional taxable income should have been reported.
A partnership must appoint a “partnership representative”. If it fails to do so, the IRS may designate someone to serve as the partnership representative. The IRS can only communicate with the partnership representative. The partnership representative may agree to tax adjustments that are binding on the partnership and all the partners.
Election Out of New Rules. Partnerships with 100 or fewer eligible partners may annually elect to require each partner to pay his/her share of the tax (use pre-2018 rule). Certain types of living trusts, LLC’s and other organizations that are frequent partners, disqualify a small partnership from electing to require the partners to pay the tax.
Late filing penalties for 1065 Partnership now $200 per partner, per month. The new law does away with the “small partnership” exception to late filing penalties for 10 or fewer partners (Rev. Proc 84-35). The only potential relief will be the first time penalty abatement waiver or reasonable cause.
- Discuss with your KTLLP tax preparer the new rules regarding elections you need to include in your partnership tax filings for 2018 and possible future tax years.
- If you have any ineligible partners, you may want to make changes so you can elect the “100 or fewer partner” exception.
- Talk with your lawyer to make changes to your governing documents.
- Select your partnership representative, limit his/her authority, and provide him/her appropriate liability protections.