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Partnership Tax Audits: The IRS' Role in the Audit

News, Offshore Account Update

Posted in on May 19, 2023

Facing a partnership tax audit means dealing with the Internal Revenue Service (IRS). The IRS has prioritized partnership tax compliance in recent years, and audits targeting partnerships can lead to substantial liability not only for the entity but potentially for individual partners as well.

As a result, if you have been notified of an impending partnership tax audit, you need to be prepared. This starts with knowing what to expect during the audit process.

What to Expect from the IRS During a Partnership Tax Audit

So, what can you expect during an IRS audit of your partnership? Here is an overview of the IRS’ role in the process:

1. The IRS Will Notify You of the Impending Audit

First, the IRS will notify you (or your partnership’s representative) of the impending audit. This notice will come in the form of a Notice of Selection for Examination (Letter 2205-D). If the IRS is planning to audit multiple years’ tax returns, it will send a copy of Letter 2205-D for each year that is under examination.

2. The IRS Will Give You the Opportunity to Be Involved

The purpose of this initial notification is to give the partnership the opportunity to play an active role in the audit process. The Notice of Selection for Examination (Letter 2205-D) specifies an IRS “contact person,” and instructs the partnership to contact this person by a specified date to schedule an “initial examination appointment.”

3. The IRS Will Move Forward Without Your Involvement

Crucially, if a partnership representative does not arrange an initial examination appointment, the audit will move forward without the partnership’s involvement. Ignoring an IRS partnership tax audit does not simply make it go away. To avoid having the IRS examine your partnership’s tax history and make a determination of liability without your involvement, you need to engage experienced tax counsel to oversee the audit process and intervene as necessary.

4. The IRS Will Make a Determination of Additional Liability

Regardless of the partnership’s level of involvement, after completing its audit, the IRS will make a determination of additional liability. It will then notify the partnership of its determination in a Notice of Proposed Partnership Adjustments (NOPPA). The NOPPA will explain the reasons for the IRS’ determination and state the amount of imputed underpayment, interest and penalties that the partnership owes.

5. The IRS Will Provide an Opportunity to Appeal  

If a partnership disagrees with the IRS’ determination, it has the right to challenge the determination through the IRS’ administrative procedures. This will be necessary in many cases—especially when a partnership ignores the IRS’ audit or tries to handle the audit on its own. Strict rules and deadlines apply, so, here too, it is imperative that partnerships have experienced tax counsel to guide them forward.

Contact Us About Your Partnership Tax Audit in Virginia

Do you have questions about facing an IRS partnership tax audit in Virginia? If so, we invite you to contact us for more information. To schedule an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or inquire online today.

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