Partnership Audits

Even though it is the individual partners, not the partnership, that are responsible for reporting and paying taxes on any gains or losses recognized by the partnership, audit proceedings on partnership items are conducted on the partnership and not the individual level.

If the Internal Revenue Service decides to audit a partnership, the business must appoint one of the general partners as a tax matters partner (TMP). It is the TMP who is responsible for dealing with the IRS on partnership audit matters and proceedings.

The Process

The IRS will mail an administrative adjustment, which is a notification of partnership deficiencies, to the TMP and other individual partners. Every partner, including every indirect partner, has the right to participate with the TMP in every phase of partnership-level administrative proceedings. However, current tax law does not require either the IRS or the TMP to provide notice to all partners for all administrative phases. If a partner wants to be present during preliminary discussions between an IRS examining agent and the TMP, he or she should make arrangement with the TMP for notification. The time and place for all partnership administrative proceedings are set by an agreement between the IRS agent and the TMP. This arrangement normally will not be changed for the convenience of another partner.

Without a showing of fraud, malfeasance, or misrepresentation of a material fact, agreements entered into between the IRS, the Attorney General, and the TMP will generally be binding on non-notice partners so long as the agreement includes a clause to that effect. Any agreement will not bind partners who have filed a timely statement with the IRS or Attorney General expressing an intent not to be bound by the agreement. Each non-notice partner has the right to independently file a separate statement at least 30 days before the date on which the TMP enters into an agreement with the IRS or the Attorney General.

If the IRS or the Attorney General enters into a settlement agreement with any partner concerning partnership items, it generally is required to offer the same terms to any other partner who files a timely written request.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.