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Your Partnership is Subject to a Tax Audit: Are You Ready to Deal With the IRS?

Articles/News, Offshore Account Update

Posted on April 14, 2023 |

The Internal Revenue Service (IRS) routinely audits partnerships for all forms of tax compliance. From underpaying income tax to failing to report offshore accounts and from failing to remit employment taxes to improperly classifying employees as independent contractors, numerous issues can lead to substantial liability for back taxes, interest and penalties. As a result, partners need to take IRS audits seriously, and this starts with getting ready to deal with the IRS.

5 Critical Insights for Preparing for an IRS Partnership Tax Audit

How can (and should) your partnership prepare for an IRS audit in Boston? Here are some important insights from partnership tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group:

1. You Need to Know if Your Partnership is BBA-Compliant

The Bipartisan Budget Act (BBA) of 2017 established new requirements for partnerships when dealing with the IRS. Partnerships have the option of either complying with these requirements or opting out annually (if they have 100 partners or fewer). BBA and non-BBA partnership tax audits are handled differently—and can have different consequences—so a key first step when facing an IRS audit is to determine whether your partnership is BBA-compliant.

2. IRS Partnership Tax Audits Can Examine All Forms of Tax Compliance Within the Tax Years That are Subject to Review

The IRS initiates partnership tax audits by issuing a Notice of Selection for Examination (Letter 2205-D). While this letter will identify the tax years that are subject to review, it will not identify the specific tax issues covered under the audit. This is because IRS audits can examine all forms of tax compliance.

3. You Need to Know What (if Anything) IRS Auditors are Going to Find

Given the potential breadth and risks of IRS partnership tax audits, partnerships need to proactively assess what (if anything) IRS auditors are going to find. This involves conducting an internal tax compliance assessment—which should be undertaken with the oversight of outside counsel to secure the protections of the attorney-client privilege.

4. Partnerships Have Several Options for Addressing Tax Compliance Deficiencies During an IRS Audit

If IRS auditors are likely to uncover tax compliance deficiencies during an audit, partnerships have several options for mitigating their liability. Depending on the circumstances, these options may include negotiating a settlement and submitting an offer in compromise, among others.

5. Accusations of Intentional Tax Evasion or Tax Fraud Can Lead to Criminal Inquiries

In addition to back taxes, interest and penalties, IRS partnership tax audits can also present risks for criminal prosecution in some cases. If auditors uncover what they believe to be evidence of intentional tax fraud or tax evasion, they can refer the matter to IRS Criminal Investigation (IRS CI) for further inquiry.

Discuss Your Partnership’s IRS Audit with Managing Partner Kevin E. Thorn

At Thorn Law Group, we represent partnerships in Boston and throughout Massachusetts in IRS audits and other federal tax matters. If the IRS is auditing your partnership, you can call 617-692-2989, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.

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