{"id":11163,"date":"2021-11-17T15:38:31","date_gmt":"2021-11-17T15:38:31","guid":{"rendered":"https:\/\/todaysveterinarybusiness.com\/?p=11163"},"modified":"2022-06-15T17:48:12","modified_gmt":"2022-06-15T17:48:12","slug":"tax-partnerships-irs-audit","status":"publish","type":"post","link":"https:\/\/navc.sitepreview.app\/todaysveterinarybusiness.com\/tax-partnerships-irs-audit\/","title":{"rendered":"Tax Partnerships Come Under Growing Scrutiny"},"content":{"rendered":"<p>The IRS is refocusing its audit efforts and imposing tax adjustments directly on partnerships rather than the partners starting with the tax year 2018. A few eligible partnerships with qualifying ownership structures might be eligible to elect out of the audit regime annually. Here\u2019s what you need to know.<\/p>\n<h3>Schedule K-1 Recipients<\/h3>\n<p>If you receive a Schedule K-1 from a limited liability company (LLC) or another entity that files a partnership tax return (IRS Form 1065), you need to be up to speed on the new partnership audit regime. You would be well advised to prepare for an audit.<\/p>\n<h3>Partnership Tax Classification<\/h3>\n<p>Keep in mind that receiving a Schedule K-1 does not mean you are a partner in a tax partnership. S Corporations, for example, issue Schedules K-1 to shareholders. Just be sure that the LLC or another entity issuing your Schedule K-1 is classified as a tax partnership for federal tax purposes.<\/p>\n<p>Many <a href=\"https:\/\/todaysveterinarybusiness.com\/relief-veterinarians-fees\/\">veterinary LLCs<\/a> and other business entities with multiple owners, particularly those that own real estate, choose the tax partnership classification because of the generous tax benefits it offers. Some multidoctor and multioffice veterinary practices tend to be structured as tax partnerships or might include a tax partnership in the overall ownership structure.<\/p>\n<h3>Legislative and Compliance Tax Changes<\/h3>\n<p>Historically, tax partnerships saw less scrutiny from IRS auditors. Recent developments in \u00a0legislation and detailed tax reporting have brought greater transparency. The changes also enabled and empowered the IRS to streamline audit procedures and enforcement involving tax partnerships.<\/p>\n<p>Further, the IRS implemented the Global High-Wealth Program, whose sole emphasis is on high-income individuals and their business entities, which frequently include partnerships. President Biden has asked Congress to allocate $80 billion to the IRS specifically for audits and technology upgrades.<\/p>\n<h3>The New Centralized Audit Regime<\/h3>\n<p>The IRS partnership audit regime applies to tax years beginning on or after Jan. 1, 2018. Unless a partnership takes additional steps, taxes, penalties and interest can be imposed by default directly on the partnership rather than its partners. The new audit regime has been centralized, which is significantly distinct from the former regime under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under the old regime, tax deficiencies were imposed directly on the partners.<\/p>\n<p>Unless a partnership is eligible and requests to modify the applicable tax rate, the new regime applies the highest individual and corporate rates to any additional taxes.<\/p>\n<h3>Electing Out<\/h3>\n<p>By default, the new regime applies to all entities taxed as partnerships (IRS Form 1065 filers). This general rule has an exception for eligible tax partnerships. A partnership that is eligible to elect out would not be subject to the regime for a <a href=\"https:\/\/todaysveterinarybusiness.com\/buy-now-save-later-section-179\/\">specific tax year<\/a> only. The election is made on a timely filed partnership tax return (IRS Form 1065).<\/p>\n<h3>Eligibility for Electing Out<\/h3>\n<p>The ownership structure determines whether a partnership may elect out. Trusts and disregarded entities, for example, preclude a partnership from electing out. In that case, veterinary partners might wish to re-evaluate whether the benefits of being classified as a partnership outweigh those of any other structure. If they do, the partners might wish to incorporate transfer restrictions and other protections into the partnership\u2019s governing documents. If they do not, the partners might want to look into restructuring as an eligible small partnership.<\/p>\n<h3>The Benefits of Electing Out<\/h3>\n<p>A partnership that elects out successfully would be audited under the prior regime, which means any tax deficiencies would be imposed directly on the partners. If the IRS invalidates the election out of the prior regime, the partnership is stuck with the new one.<\/p>\n<h3>The Inability to Elect Out<\/h3>\n<p>Loss of a partnership\u2019s eligibility to elect out might be inadvertent. That can happen when an ineligible partner joins the partnership. Veterinary partners would be wise to carefully consider their structure and governance, particularly in cases where the partnership might have to defend an IRS audit at the partnership level.<\/p>\n<h3>Partnership Representatives<\/h3>\n<p>Note that the partnership representative has replaced the tax matters partner. While the tax matters partner had to be a partner, that is not the case anymore. Now, any individual or business entity may serve as the partnership representative so long as one has a substantial presence in the United States.<\/p>\n<p>That means that any partner or outside adviser, accounting firm, law firm or third party may be eligible to become a partnership representative. Even the partnership itself can serve as the partnership representative so long as it appoints a designated individual to act in that capacity.<\/p>\n<h3>The Sole Authority to Act<\/h3>\n<p>The new IRS audit regime grants the partnership representative the sole authority \u2014 essentially, the highest level of authority \u2014 to act on behalf of the partnership. No one but the partnership representative may communicate with the IRS and act on an IRS audit, appeal or tax litigation. The IRS will meet, discuss and correspond only with the partnership representative. The partnership representative may delegate the authority to a tax professional, who will communicate with the IRS and advise the partnership about prudent actions.<\/p>\n<p>The partnership representative has the sole authority to bind the partnership and its partners to any settlement or agreement with the IRS. Inclusivity is quite broad in such a binding effect. All audit-year and current-year partners could suffer consequences under the new tax regime unless, and potentially even when, contractual precautions are taken. While contractual mechanisms can be implemented to shift the risks, the actions are binding on the partnership and partners from the IRS\u2019s perspective.<\/p>\n<p>Careful selection of the partnership representative becomes critical because once the representative has been selected and taken an action, the individual partners may not intervene.<\/p>\n<h3>A New Partnership Representative<\/h3>\n<p>Changing the partnership representative is not an option once a partnership tax return has been filed. The new regime imposes special rules and timing for replacing the representative, so choose wisely.<\/p>\n<h3>Forthcoming IRS Audits<\/h3>\n<p>The IRS has initiated audits of open tax years beginning after Jan. 1, 2018. It also hired auditors with substantive expertise in partnership taxation. The IRS announced that audits of large partnerships (those with income or assets of $10 million or more) are to begin before the end of 2021. This time, the IRS is deploying data analytics to perform risk assessments and identify partnerships and tax issues for audit. The results will be leveraged and applied more broadly to partnerships across the board.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Are you prepared for the new IRS partnership audit regime?<\/p>\n","protected":false},"author":366,"featured_media":11164,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"iawp_total_views":0,"footnotes":""},"categories":[90],"tags":[],"class_list":["post-11163","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-online","column-online-exclusive","clinical_topics-finance"],"acf":{"hide_sidebar":false,"hide_sidebar_ad":false,"hide_all_ads":false},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.7 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Tax Partnerships Come Under Growing Scrutiny | Today&#039;s Veterinary Business<\/title>\n<meta name=\"description\" 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