Paul Hastings LLP, Thomas S. Wisialowski , Erika Mayshar and Noah Metz: “Hedge funds, private equity firms, real estate companies, and other businesses structured as partnerships or limited liability companies are paying close attention to recent changes in IRS audit procedures. . . . This means that under the rules described above, if a partnership filed a tax return and paid its taxes in year 1 (the year 1 tax return), partner X sold its interest in the partnership to new partner Y in year 2, and the partnership was audited in year 3 in respect of its year 1 tax return, then partner Y would bear its share of any additional tax liability assessed on the partnership in year 3 in respect of the year 1 tax return, despite that partner X, and not partner Y, was a partner in the partnership in year 1.”

The article states one of the most important reason that operating agreement of all LLCs taxed as partnerships must be amended to deal with the new audit rules:

“Partnership and LLC agreements should generally be revised to provide for who will act as the ‘partnership representative’ because in the absence of an appointed person, the IRS has the discretion to pick a ‘partnership representative.’

Related posts:

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  2. Bipartisan Budget Act of 2015 Introduces New Partnership IRS Audit Rules
  3. Partnership Audit Reform: New Partnership-level Tax Impacts Partnerships & LLCs
  4. New Audit Rules Require Changes to Partnership and LLC Operating Agreements
  5. New Partnership Tax Audit Rules Require Changes to Operating Agreements