In recent years, the Internal Revenue Service (IRS) has significantly ramped up its efforts to audit partnerships, including Limited Liability Companies (LLCs) taxed as partnerships. With expanded enforcement and the adoption of new centralized partnership audit rules under the Bipartisan Budget Act (BBA) of 2015, businesses must now be more prepared than ever to face complex audits with serious financial implications.
At The Law Office of Sally Reddy, we help partnerships in San Diego and throughout California navigate IRS audits, protect their interests, and ensure long-term compliance.
Why the IRS Is Focusing on Partnerships
The IRS has identified partnerships as an area of substantial tax gap risk due to:
- The rise of pass-through entities, particularly LLCs and LLPs
- Inconsistent reporting among partners
- Complex ownership structures that make tax enforcement difficult
To streamline enforcement, the IRS introduced a centralized partnership audit regime, which simplifies audit procedures but can also increase risk for partnerships.
What Changed Under the BBA Audit Rules?
Under the Bipartisan Budget Act of 2015, which took full effect in 2018, the IRS now audits partnerships and assesses tax at the entity level, rather than requiring each partner to amend their individual tax return. Key highlights include:
- Partnership-Level Adjustments: The IRS can now directly assess and collect underpayments from the partnership itself.
- Default Assessment at Highest Rate: Unless properly modified, assessments are calculated at the highest applicable individual or corporate tax rate.
- Partnership Representative Requirement: Every partnership must designate a Partnership Representative (PR) who has exclusive authority during the audit—replacing the traditional “tax matters partner.”
- Limited Opportunity for Opt-Out: Only eligible partnerships with 100 or fewer qualifying partners (generally individuals or C corporations) may elect out annually.
Risks and Consequences for Partnerships
Increased audit scrutiny means partnerships are now exposed to greater risks, including:
- Unexpected tax liabilities at the entity level
- Limited appeal rights if deadlines are missed
- Increased administrative burden and need for documentation
- Liability even for current partners related to past-year returns
Additionally, once the IRS issues a Notice of Proposed Partnership Adjustment (NPPA), there’s a narrow window to request an appeal. If that deadline is missed, partnerships must navigate a complex “modification process,” which is often time-consuming and restrictive.
How Sally Reddy Can Help
Sally Reddy, J.D., LL.M., is a California Certified Tax Law Specialist with deep experience in partnership audits, tax controversy, and federal tax litigation. She helps partnerships:
- Understand and comply with the new audit regime
- Designate or update a qualified Partnership Representative
- Respond strategically to IRS notices and document requests
- Challenge and negotiate adjustments or penalties
- Protect individual partners through modification elections
- Prepare for appeals before the U.S. Tax Court or IRS Office of Appeals
Her hands-on, proactive approach ensures that clients are fully informed and positioned for the best possible outcome.
Best Practices for Partnership Audit Readiness
To reduce risk and strengthen audit defense, partnerships should:
- Review operating agreements and assign a Partnership Representative annually
- Maintain organized, accessible records of income, allocations, and deductions
- Ensure consistent reporting among all partners and related entities
- Consult a tax attorney early when audit risks or red flags emerge
- Consider opting out, if eligible, to avoid entity-level adjustments
Final Thoughts
With the IRS focusing heavily on partnership compliance, now is the time to take a closer look at your entity’s audit readiness. The financial stakes are high, and the new rules are not forgiving.
If you receive a notice from the IRS or want to proactively review your partnership’s risk exposure, reach out to The Law Office of Sally Reddy. With a disciplined, knowledgeable approach and a proven track record in tax controversy, Sally is your partner in achieving clarity, protection, and peace of mind.
Contact us today for a confidential consultation.