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Dealing with the IRS for Your Partnership Tax Audit

News, Offshore Account Update

Posted in on April 14, 2023

Partnership tax audits present substantial risks. If the Internal Revenue Service (IRS) determines that a partnership has underreported or underpaid its federal tax liability, it can impose liability for back taxes, interest and penalties. If the audit uncovers evidence of intentional tax evasion or tax fraud, auditors can also hand over the matter to IRS Criminal Investigation (IRS CI) for further inquiry and a possible referral to the U.S. Department of Justice (DOJ).

Avoiding unnecessary consequences during an IRS partnership tax audit requires a proactive and strategic approach. Here, tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group in Virginia, shares some tips for preparing to deal with the IRS:

5 Tips for Dealing with the IRS During a Partnership Tax Audit

1. Make Sure You Know Which Tax Years Are Under Review

One of the first steps to take when facing an IRS partnership tax audit is to ensure that you know which tax years are under review. This should be clearly stated in the Notice of Selection for Examination (Letter 2205-D) your partnership received from the IRS.

2. Determine if Your Partnership is BBA-Compliant (or Has Opted Out of Compliance)

In 2017, the IRS adopted new partnership tax audit rules in response to the enactment of the federal Bipartisan Budget Act (BBA). Among other requirements, these rules mandate that partnerships designate a “Partnership Representative” to deal with the IRS during audits and other matters.

However, small partnerships (those with 100 or fewer partners) also have the option of opting out of BBA compliance annually. As a result, when facing audits, partnerships should review their partnership agreements and federal returns to determine if they are compliant and/or if they have opted out of the BBA for any of the tax years that are under review.

3. Meet the Deadline to Schedule an Initial Examination Appointment

As the IRS notes, upon receiving a Notice of Selection for Examination, the partnership should “[c]all the IRS contact person listed on Letter 2205-D by the specified date to schedule an initial examination appointment.” While this requirement is fairly self-explanatory, it is important that partnerships engage tax counsel to communicate with the IRS on their behalf and advise them of any risks.

4. Conduct an Internal Tax Compliance Assessment

Any time you are dealing with the IRS, it is important to know what (if anything) the IRS is going to find. To this end, partnerships that have received a Notice of Selection for Examination should conduct an internal tax compliance assessment to independently assess their tax compliance.  

5. Work with Your Partnership’s Tax Counsel to Execute a Strategic Defense

Due to the risks involved with facing an IRS tax audit, partnerships that are facing audits need to work with experienced tax counsel to execute a strategic defense. Partnership tax audits can (and frequently do) lead to unnecessary and unjustified liability, and to avoid these outcomes, partnerships need to rely on the advice and representation of experienced counsel.

Contact Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

Thorn Law Group represents Virginia-based partnerships in tax audits and other IRS matters. If the IRS is auditing your partnership, we encourage you to contact us promptly for more information. Call 703-752-3752, email ket@thornlawgroup.com or contact us online to arrange a confidential initial consultation with tax attorney and Managing Partner Kevin E. Thorn.

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