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IRS Partnership Audit Rules for Private Equity and Hedge Funds

Partnership Level Tax, Push-Out Elections, Partnership Representative Provisions, and More

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Tuesday, January 18, 2022

Recorded event now available

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This CLE course will examine the IRS partnership audit rules and their impact on private equity and investment funds. The panel will discuss the provisions for partnership and LLC agreements in contemplation of the new rules, the elections available to smaller partnerships to avoid a partnership-level audit, modifications to the partnership-level tax, and the election to "push-out" the tax.


For partnerships, including LLCs taxed as partnerships, the audit rules introduced under the Bipartisan Budget Act of 2015 were a game-changer. Beginning in 2018, the rules have impacted most partnerships, regardless of size. Partnership audits are expected to increase as a result of these rules and the IRS’ increased focus on partnership audits and more funding. The IRS now assesses and collects taxes at the partnership level as opposed to the individual partner level. Any adjustments to the partnership's income, gains, losses, or deductions will be assessed in the year in which the tax audit concludes.

For private equity and hedge funds--where ownership changes may occur due to redemptions, investor defaults, or other events--the assessment of a partnership-level tax in the year in which an audit concludes may subject current partners to tax liability for periods they may not have been partners or held a different ownership percentage.

To avoid the wrong partners bearing tax liability in the wrong amount, PE funds can request modifications to the partnership tax or make a “push-out” election within 45 days of a final adjustment. PE funds may need to amend their partnership agreements to address these contingencies, and partners may want side letter agreements that impose obligations on PE funds during a partnership audit.

PE funds must select a partnership representative with broad authority to bind the partnership and its partners to agreements with the IRS. Partners no longer have the right to participate in a partnership audit. LLC agreements must clearly define the responsibilities and indemnities available to this representative.

Listen as our authoritative panel discusses current partnership audit rules with a particular focus on their impact on private equity and other investment funds. The panel will discuss provisions in partnership or LLC agreements to address the new audit regime and the opt-outs and exclusions available.



  1. Overview of the new partnership audit rules and partnership audit trends
  2. Exceptions and opt-out rules
  3. Partnership representative requirements, authority, and obligations
  4. Drafting considerations for partnership or LLC agreements and side letter agreements for private equity and other investment funds
  5. Implications of partnership level tax vs. individual partner level tax
  6. Potential audit surprises like statute of limitations and an unexpected partnership-level tax on non-income items


The panel will review these and other key issues:

  • What options are available to smaller partnerships and LLCs to opt out of the partnership-level taxation requirement?
  • What provisions should be included in partnership or LLC documents to clearly define the role of the "partnership representative"? What are common points of negotiation in side letter agreements?
  • How can a partnership ensure that the correct amount of tax is paid by the correct partners? Is a push-out election always the best option?


Baker, Adrienne
Adrienne M. Baker


Ms. Baker focuses her practice on the taxation of private and regulated investment companies—including hedge...  |  Read More

McNulty, Mary
Mary A. McNulty

Holland & Knight

Ms. McNulty represents large business taxpayers in IRS audits, appeals and tax litigation, with emphasis on federal tax...  |  Read More

Meyercord, Lee
Lee S. Meyercord

Holland & Knight

Ms. Meyercord represents taxpayers in all stages of a federal tax dispute, including audits, administrative appeals and...  |  Read More

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