Setting Expectations for Partnership Tax Audits

Articles/News, Offshore Account Update

Posted on May 19, 2023 |

When preparing for a partnership tax audit, it is important to know what to expect. Successfully navigating a partnership tax audit requires careful planning and preparation, and it requires the ability to engage effectively with the Internal Revenue Service (IRS) throughout the process. With this in mind, here is an overview of what partners can (and should) expect after receiving a Notice of Selection for Examination (Letter 2205-D) from the IRS.

What to Expect During an IRS Partnership Tax Audit

1. The IRS Will Move Forward Without Your Involvement

When a partnership receives Letter 2205-D, the partnership is expected to contact the IRS agent identified in the letter to schedule an initial examination appointment. But this doesn’t mean that if the partnership ignores the audit, it will simply go away. If the partnership doesn’t respond, the IRS will conduct the audit without the partnership’s involvement, and there is a high likelihood that this will lead to a finding of additional liability.

2. Playing an Active Role in the Partnership Tax Audit Process is Critical

It is critical for partnerships to play an active role in the IRS audit process. Upon receiving Letter 2205-D, a partnership should promptly engage tax counsel to communicate with the IRS on the partnership’s behalf. Partners should also work closely with the partnership’s tax counsel to assess potential outcomes and develop a comprehensive audit defense strategy.

3. The IRS Will Notify You of Its Decision Regarding Additional Tax Liability (or “Proposed Partnership Adjustments”)

After conducting its audit, the IRS will render a decision regarding additional tax liability. The partnership will be notified of this decision in a Notice of Proposed Partnership Adjustments (NOPPA). The NOPPA will contain the following forms and information:

  • Letters 5892 and 5892-A – These letters explain “how to agree with the proposed audit adjustments, submit a request to modify the proposed imputed underpayment and receive a final partnership adjustment.”
  • Form 14792 – This form provides the IRS’ proposed imputed underpayment amount as well as the interest and penalties owed based on this amount.
  • Form 866-A – This form explains “each issue [uncovered during the audit] and provides a detailed explanation of the proposed adjustment, the facts, related law, taxpayer position and conclusion.”

4. There Are Several Opportunities to Challenge the IRS’ Determination

Partnerships have several opportunities to challenge the IRS’ processes and decisions both during and after the audit process. Filing an appeal will often be necessary, as partnership tax audits frequently lead to unwarranted determinations of additional liability.

5. An IRS Partnership Tax Audit Can Lead to Additional Scrutiny

Another risk associated with facing a partnership tax audit is the risk of the audit leading to additional scrutiny. If revenue agents uncover evidence of possible intentional tax fraud, they may refer the matter to IRS Criminal Investigation (IRS CI) for further inquiry. In many cases, partnership tax audits can lead to scrutiny of individual partners’ tax returns as well.

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

If the IRS is auditing your partnership in New Jersey, we invite you to contact us for more information. To arrange a confidential consultation with tax attorney 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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