On November 2, 2015, the President signed into law the Bipartisan Budget Act of 2015. That statute makes significant changes governing federal tax audits of entities that are treated as partnerships for US federal income tax law. In other words, the statute affects all LLCs and partnerships.
Some LLCs are disregarded entities, not taxed as partnerships, and not covered by the law – yet – BUT the introduction of a co-owner, perhaps through unforeseen circumstances, could trigger application of the statute. The same can be said of LLCs which are being treated as S corporations. Almost all of those companies have company agreements or regulations which have partnership tax rules embedded in them – just in case. And that language will have to be changed significantly.
Those who have any involvement in tax practice, from enrolled agents to CPAs to tax attorneys, have at least heard of TEFRA, an acronym for the Tax Equity & Fiscal Responsibility Act, passed decades ago which had a significant impact on how partnerships, and later LLCs, were audited. Those audit rules are now history, replaced by these new provisions. Terminology commonly found in countless LLC and partnership agreements will change as a result.
Perhaps the single biggest change in the law is that the partnership now can be forced to pay the taxes, rather than the partners! Read the following paragraph very carefully, and consider what happens to you if you are a partner, the partnership shuts down, the IRS starts an audit some time later and appoints a partnership representative, no notices are given to you, and suddenly you are hit with a massive tax with penalties and interest – with no warning.
Many, if not most, documents referred to a “tax matters partner.” That concept is going to be replaced by something called a “partnership representative” who can be appointed by the partnership, or who can be appointed by the IRS! And, very significantly, the new law will no longer require the IRS to give certain notices to the partners directly about the audit. Many LLC and partnership agreements have no provisions whatsoever for notices from the partnership or the tax matters partner, to the partners on a timely basis, and almost none have any provisions for continuing the role of the tax matters partner now know as the partnership representative after shut-down.
The effective date is a couple of years off – for tax years commencing after 2017. That seems like an eternity, but a nationally noted LLC and partnership expert, Terry Cuff, remarked recently”
“The delayed effective date does not mean that partnership tax advisers can take a siesta until the end of 2017. The changes have profound implications for partnership agreements drafted today and afterward – and also for partnership agreements drafted yesterday and before.”
Sadly, there are many unanswered questions. The new statute does not appear to have been well drafted. A recent white paper by a major law firm lists 2-1/2 pages of open issues which the statute did not address. And that means that your LLC and partnership documentation will have to be examined very carefully, modified appropriately and made ready. And you have about a year and a half to get that work completed.
Stay tuned!!!