Key takeaways

• The Bipartisan Budget Act of 2015 substantially changes how the IRS makes tax audit adjustments to partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. The changes are intended to enhance the IRS’s ability to audit partnership tax returns by enabling the IRS to collect taxes, interest and penalties that result from a partnership tax audit directly from the affected partnership.
• The new rules will apply to tax returns of partnerships for tax years beginning after 2017.
• Partnerships and LLCs that are treated as partnerships can avoid paying entity-level taxes in respect of an IRS adjustment by opting to send amended Form K-1s to the individuals or entities that were partners of the partnership in the year that was reviewed in the tax audit. Each of the partners will then be required to pay any additional tax, interest and penalties.
• Prior to the effectiveness of the new rules, partnerships and LLCs that are treated as partnerships should review their operating agreements to determine whether to implement amendments to take into account the new rules, including enabling or requiring the partnership to elect the Form K-1 adjustment procedure.