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Is Your Partnership Agreement Protecting Your Partners from Tax Audits?

Beginning with 2018 tax returns, partnership audits will change to collect tax from the entity itself rather than individual partners. The tax is calculated by multiplying the imputed underpayment amount by the ‘applicable highest tax rate,’ which is the highest individual or corporate rate in effect for the year under review.

The act specifies that any payments required to be made by a partnership are not deductible.

As an alternative to taking the adjustment into account at the partnership level, a partnership can make an election, not later than 45 days after a notice of final partnership adjustment, to issue adjusted information returns to the reviewed year partners, in which case those partners would take the adjustment into account on their individual returns in the adjustment year through a simplified amended-return process.

Without making an election to pass-through changes to partners who were partners under the year audited, there may be adverse economic impact on current partners. The new law has the effect of shifting the economic burden of the additional tax liability from those persons who were partners for the year under audit (the reviewed year) to the current partners in the partnership. Therefore, partnerships should address this tax election in their partnership agreement.

California Nonconformity: As usual California doesn’t follow federal law. The federal change or correction must be reported to California for the tax year that was examined by filing an amended return. Whereas, for federal tax purposes, the change or correction is reported in the year the audit/examination is completed.

To schedule a consultation on the new partnership audit rules contact me today.

Richard Pon CPA, CFP