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Do new partnership tax rules increase your risk of a tax audit?

A recent article makes a dire prediction: the risk of partnership audits may increase due to new tax rules.

As readers may know, a partnership is often treated as a pass-through entity under the Internal Revenue Code. That means that the partners have personal responsibility for a general partnership’s tax obligations. The new rules, however, would treat the partnership as its own entity, making it responsible for tax liabilities.

Under the new rules, one partner in the partnership will function as the partnership representative and have sole authority to act on the business’ behalf. Any actions taken by the partnership representative will be binding on all of the partners. The new approach will apply to all partnerships beginning in tax year 2018 unless the partners make an election to opt out. Notably, that election will have to be made every year.

One rationale for the changed tax approach might be administrative ease: The IRS will be able to assess taxes against the partnership directly, rather than sorting through thousands of IRS Form K-1s filed by partners in a multi-tiered partnership. That streamlined process may permit the IRS to perform more audits.

Receiving an audit notice from the IRS can be concerning, and for good reason: IRS penalties for alleged tax evasion can be severe. From failing to report income to taking improper deductions, a small business owner might be facing serious financial repercussions after an audit. Yet if mistakes do surface from an audit, rest assured that a tax lawyer is up to the task of negotiating with the IRS for a favorable solution. Options like installment payment plans or offers in compromise might help a taxpayer survive a tax audit and begin fresh.

Source: Accounting Today, “A ‘Seismic Shift’ in the Partnership Audit Rules,” Roger Russell, Oct. 18, 2016

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