When you are in a partnership, there are special rules about what happens if there is a tax issue with the partnership.? These are called the Partnership Audit Rules.??Under these rules the partnership can elect how they are going to manage any audit issues.
The Partnership Audit Rules Overview:
- Centralized Audit System: The IRS now audits partnerships as a whole, not individual partners. Any tax adjustments are made at the partnership level, and the partnership pays any additional tax.
- Partnership Representative: Each partnership must choose a representative to deal with the IRS. This person has full authority to act on behalf of the partnership during an audit.
- Imputed Underpayment: If the IRS finds that the partnership owes more tax, this amount is calculated using the highest tax rate and must be paid by the partnership in the year the audit is finalized.
- Push-Out Election: The partnership can choose to pass the tax adjustments to the partners from the year being audited. These partners then pay the additional tax on their individual returns.
- Administrative Adjustment Request (AAR): The partnership can request changes to its tax items for any year by filing an AAR. The changes are applied in the year the request is filed.
- Consistency Requirement: Partners must report items on their tax returns the same way the partnership does unless they file a special form (Form 8082) to report differences.
- Substantial Presence in the U.S.: The partnership representative must have a significant presence in the U.S., including a U.S. address and phone number.
- Opting Out: Small partnerships with fewer than 100 partners can choose to opt out of this audit system by making an election on their annual tax return (Form 1065).
?If you have a partnership, you need to at least consider how you want to proceed. If you dont select otherwise, you hare electing to have the partnership be responsible.
If this affects you, reach out to your CPA
