IRS Partnership Audit Rules for Private Equity and Hedge Funds
Partnership Level Tax, Push-Out Elections, Partnership Representative Provisions, and More
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
- work Practice Area
Banking and Finance
- event Date
Tuesday, January 18, 2022
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
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This 90-minute webinar is eligible in most states for 1.5 CLE credits.
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.
Ms. Meyercord represents taxpayers in all stages of a federal tax dispute, including audits, administrative appeals and federal income tax litigation. She has represented a broad range of clients, including Fortune 100 companies, large partnerships, closely held businesses, exempt organizations and high-net-worth individuals. She has significant experience in partnership tax issues relating to energy, real estate and private equity.
Ms. McNulty represents large business taxpayers in IRS audits, appeals and tax litigation, with emphasis on federal tax procedural issues, interest, penalties and partnership audits. She has significant knowledge and experience in partnership tax issues relating to private equity, energy, real estate, and exempt organizations.
Ms. Baker focuses her practice on the taxation of private and regulated investment companies—including hedge funds and private equity funds—and financial products; partnership taxation; and international taxation, including FATCA. In 2015, she was named one of the 50 Leading Women in Hedge Funds by The Hedge Fund Journal in a report sponsored by EY which recognizes 50 female hedge fund industry leaders based on data gathered from interviews with industry experts based in Asia, the U.S. and Europe. In 2016, she was chosen as one of 50 Top Women in Law by Massachusetts Lawyers Weekly for her outstanding accomplishments in the legal community. In 2017, she was elected a Fellow of the American Bar Foundation, a global honor society of lawyers who have demonstrated outstanding dedication to the highest principles of the legal profession and to the welfare of their communities. Ms. Baker is a former chair of the New Developments Subcommittee of the Committee on Investment Companies of the ABA’s Tax Section, and is a frequent speaker at investment fund conferences.
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.
- Overview of the new partnership audit rules and partnership audit trends
- Exceptions and opt-out rules
- Partnership representative requirements, authority, and obligations
- Drafting considerations for partnership or LLC agreements and side letter agreements for private equity and other investment funds
- Implications of partnership level tax vs. individual partner level tax
- 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?
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