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#1 Posted : Saturday, June 2, 2018 4:40:44 PM(UTC)

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All partnerships will be subject to new audit rules for tax years starting in 2018. The new rules apply to all partnerships but certain partnerships can elect to be exempt. If the partnership has 100 or fewer partners and the type of partner meets certain criteria the partnership can elect to be exempt from the new audit procedures. This election must be done annually and filed with or before the form 1065 is filed. The election is specified in Section 6221 of the Internal Revenue Code. The IRS has gone strictly by the letter of the law and has determined that partnerships that have a trust as a partner can not make the exemption election under Section 6221. If your club has any members who hold their interest in a revocable living trust then your club will not qualify for this election.
Audits of small investment partnerships are pretty rare but the new rules could spark an increase in such audits. There is another section of the tax code that will allow partnerships to effectively exempt themselves from the new rules. It can not be invoked until a notice of audit is received. The basics of this exemption is the club promises to file an amended return and all partners agree to file an amended return for the audited year. A fairly simple process for investment clubs and probably what they would have done anyway if they had discovered an error in a previous return.
There is another important aspect of the new audit rules. In tax matters the IRS will deal only with a partnership tax representative. This is NOT the same as the designated Tax Matters Partner (TMP) that can be identified on form 1065. The representative does not need to be a partner in the partnership they represent. Also, if the partnership has not designated a representative before an audit the IRS will appoint one. Your club will have no choice in the matter after the IRS makes this appointment.
My research into the tax representative has found many law firms posting opinions on what to include in amendments to partnership agreements to include provisions for appointing a tax representative. All of these opinions include recommendations that partnerships include how the representative is chosen and limitations on the ability of the representative to make settlements with the IRS without approval of the partnership. An internet search of "New partnership audit rules" will bring many articles on the subject.
While the new audit rules could have an impact on investment clubs it appears clubs following the BetterInvesting pathway should have little or no problems with the new rules. The rules tend to be directed mostly at partnerships with 100 or more partners. In addition, there are at least 2 easy ways to be exempt from the possibly onerous parts of the new rules for most investment clubs. Some changes to partnership agreements to account for tax representatives do need to be made before filing 2018 partnership tax returns.
I do want to remind readers I am not an attorney or CPA so if you have questions regarding the application of the new rules to your specific club consider consulting a professional in this area.
I have been informed a BetterInvesting webinar is planned for June 12 covering the new audit rules. I have been asked to participate and barring some unforeseen event I will be there.


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