Have You Amended Your LLC’s Operating Agreement? Here’s Why You Should.
By: Molly McDonald
The auditing requirements for
partnerships and limited liability companies taxed as partnerships have
changed. If your LLC is taxed as a
partnership, not updating your LLC’s Operating Agreement could end up costing
you power over the actions of your LLC and money.
In 2015, Congress enacted the
Bipartisan Budget Agreement of 2015, or the BBA. Bipartisan Budget Act of 2015, Pub. L. No.
114-74, 129 Stat. 584 (2015). Beginning
January 1 of this year, the BBA caused the Internal Revenue Service’s audit
rules for partnerships and businesses taxed as partnerships to change. Pub. L. No. 114-74, § 1101.
In the past, the IRS did not
audit partnerships, it only audited members of partnerships. Gregory H. Taggart, LLCs: New Rules and Regulations, 4-5 (Jan. 2018). Under the BBA, not only may the IRS audit a
partnership, but it also may collect underpayment and penalties from previous
years from the partnership. Id. at 5, 6. A current member of an LLC taxed as a
partnership could be responsible for this underpayment and penalties for
previous years, even if that current member was not a member during those
previous years. Betty J. Boyd, Dig into the New Partnership Tax Rules,
Business Law Today at 9 (Feb. 2016).
Further, under the new audit
rules, a member has no right to participate in audits by the IRS or even have
notice of an audit. Id. Those rights are vested
in a newly created role, the “partnership representative.” 26 U.S.C. § 6223. The partnership representative, who does not
need to be a member of the LLC, has the sole authority to act on behalf of the
partnership. Id. If a partnership or an
LLC taxed as a partnership does not choose its own partnership representative,
the Secretary of the Treasury can choose for it. Id.
By updating your Operating
Agreement, you can ensure you choose your LLC’s partnership representative, you
decide what the partnership representative is required to convey to other
members, and members and former members are ultimately responsible for their
tax penalties.
It is possible to opt out of
the new audit rules. If your LLC has one
hundred members or less and each partner is either an individual, an estate, a
C corporation, or a foreign corporation, your LLC can opt out of the new audit
requirements. 26 U.S.C. § 66221(b). Your LLC can make this election by updating
its Operating Agreement.
Bottom Line: With
the new partnership audit rules adopted as part of the BBA, it is important—if
your LLC is taxed as a partnership—to update your LLC’s Operating Agreement.
Molly
McDonald is an associate at Sowell, Gray, Robinson, Stepp & Laffitte,
LLC. Her practice focuses on commercial
real estate transactions and litigation, including workouts, bankruptcy, and
foreclosures.
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