New IRS Partnership Audit Rules for Private Equity and Hedge Funds

Description

For partnerships, including LLCs taxed as partnerships, the new audit rules are a game-changer. Enacted under the Bipartisan Budget Act of 2015, the rules impact most partnerships, regardless of size, since Jan. 1, 2018. Under the new regulations, the IRS will assess and collect 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 a tax audit occurs.

For private equity and hedge funds, in which 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 cause current partners to be subject to tax liability for periods they may not have been partners or held a different ownership percentage.

PE funds can make a "push-out" election within 45 days of a final adjustment but may also need to amend their partnership agreements to address these contingencies.

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

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