Partnership Tax Audits Preparation: Be Ready for the IRS

Articles/News, Offshore Account Update

Posted on April 14, 2023 |

If you have received a Notice of Selection for Examination (Letter 2205-D), this means that the Internal Revenue Service (IRS) is preparing to audit your partnership. It also means that you need to get prepared. Dealing with an IRS partnership audit can be a time-intensive, resource-intensive and high-risk process. As a result, partnerships need to ensure that they do everything they can to minimize their risk of facing unnecessary assessments, interest and penalties.

Preliminary Steps to Prepare for an IRS Tax Audit

What should you do if you have received a Notice of Selection for Examination from the IRS? Here are five preliminary steps for preparing for an IRS partnership audit:

  • Review the Notice of Selection for Examination – Review the Notice of Selection for Examination to determine which tax years are under review. Identify the point of contact and deadline for scheduling an initial examination appointment with the IRS.
  • Identify Your Partnership’s “Partnership Representative” – Review your partnership agreement or operating agreement to identify your partnership’s “Partnership Representative.” Under partnership audit provisions of the Bipartisan Budget Act (BBA), all partnerships should have a designated representative for all audit-related communications.
  • Engage Your Partnership’s Tax Defense Counsel – Engage your partnership’s tax defense counsel to assist with responding to the Notice of Selection for Examination. Work with your partnership’s counsel to identify and execute the next steps.
  • Establish Internal Controls and a Chain of Command – To avoid communication breakdowns and inadvertent disclosures to the IRS, partnerships should establish internal controls and a chain of command when preparing for an IRS partnership audit.
  • Schedule an Initial Examination Appointment – After taking these preliminary steps, the Partnership Representative or the partnership’s tax counsel should contact the IRS to schedule an initial examination appointment.

Under the BBA, when an IRS partnership tax audit uncovers a reporting violation or payment deficiency, the IRS can impose liability at the entity level. This is a change from the prior rules under the Tax Equity and Fiscal Responsibility Act (TEFRA). However, small partnerships (those with 100 or fewer partners) can elect out of BBA treatment; and when facing scrutiny from the IRS, small partnerships should have their counsel determine whether they have properly opted out of BBA treatment as well.

Conducting an Internal Tax Compliance Audit and Risk Assessment

Another critical step when preparing for an IRS partnership audit is to conduct an internal tax compliance audit and risk assessment. To defend themselves effectively during the IRS audit process, partnerships need to know what (if anything) the IRS’ auditors are going to find. Working with their counsel, partnerships should review their returns for the tax years in question, review their books and other substantiating documentation, and make informed and unbiased decisions about their tax compliance.

Request an Appointment with Partnership Tax Lawyer Kevin E. Thorn in New Jersey

If your partnership is preparing for an IRS audit, we encourage you to contact us for more information. To request an appointment with partnership tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696, email or send us a message online today.

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