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Thursday, February 4, 2016

Do We Really Have to Change Every Operating Agreement? The New Partnership Audit Rules

The Bipartisan Budget Act of 2015 and the Protection of Americans for Tax Hikes Act of 2015 created new audit rules, which will in 2018 (unless for some generally ill-advised reason you want to opt in early) replace the current TEFRA regime.  The new default rule is that if a partnership (or an LLC, LP, etc. taxed as a partnership) is audited, there will be a partnership level determination, assessment and collection.  The problem with this default regime is what happens if you currently have different partners than who you had during the year being audited?  Also problematic is if certain allocations are challenged, the IRS will still assess the tax difference against the partnership (rather than simply undoing the allocations), which can create distortions. Notice comes solely to the partnership, and a partner individually cannot appeal.  The partnership only has 90 days from the date of final adjustment to appeal.  According to the new law, “imputed underpayments” will be determined “by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year.” (emphasis added).

What to do about the new audit regime?  Opt out! If you can….

If you elect out then the IRS has to pursue each separate partner.  However, you must have less than 100 K-1s (and if you have an S Corp member each shareholder is counted separately for purposes of this limit).  You also must have individuals, corporations, or estates of deceased partners as members.  A partnership that has a partnership (or an LLC taxed as a partnership) as a member (i.e. an upper tier partnership) cannot opt out.  It is unclear as to how trustees will be treated, although informally it has been suggested at a recent ABA tax conference that the IRS might deal with this issue through regulations.

We will also have to say goodbye to the tax matters partner.  There is now a Partnership Representative.  Unlike the tax matters partner, this person can be a non-partner and nonresident (but must have substantial US presence).  Interestingly enough, this flexibility might not actually be a good thing.  If a Partnership Representative has not been appointed, then the IRS can appoint one.  It is an open question as to whether the IRS would use this flexibility to appoint a non-partner who is favorable to the IRS.

So, in light of all of this, should current operating agreements be amended?  At this point, in many cases it might be better to wait for a bit more guidance.  However, for current deals, it would seem quite prudent to incorporate very flexible language that can take into account these new rules, especially since these rules can alter the economics of a deal, particularly between current and former partners.  Moreover, extra thought should be given as to which types of partners may join the partnership.

Monday, July 20, 2015

Minor Children and IRA/401Ks Beneficiary Designations: Dangers and Concerns

As a parent, one of the most difficult issues that I have had to deal with is what would happen to our young child should anything happen to my wife and I.  No one likes to contemplate their own mortality or the idea of not being there to watch their children grow up.  Unfortunately, mortality is inescapable, and proper planning is essential. Often people think that once they have their Will done everything will be settled. This is rarely the case.

Wednesday, February 19, 2014

IR-2014-16: IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

The IRS has released its dirty dozen list regarding tax scams.  Note that "Hiding Income Offshore" is once again on the list.  Of note is their list of structures that have been used by individuals to hide income, such as "offshore banks, brokerage accounts or nominee entities . . . foreign trusts, employee-leasing schemes, private annuities or insurance plans . . ."  This is why it is essential for proper reporting to be done, not just for individuals but for their related entities as well.

Despite the end of this section, which states that taxpayers should come forward to "pay their fair share," taxpayers who fail to report will oftentimes find themselves having to pay far more than their fair share.

IR-2014-16: IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

Monday, July 1, 2013

Getting married this summer? The IRS has published some tax tips!

The IRS just published some helpful tax tips for newlyweds.  Here is IRS Summertime Tax Tip 2013-01:

Tax Tips for Newlyweds

Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds.

  • It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at, by calling 800-772-1213 or by visiting your local SSA office.
  • If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at or report the change at your local post office.
  • If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  • If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at to help you complete a new Form W-4, Employee's Withholding Allowance Certificate. See Publication 505, Tax Withholding and Estimated Tax, for more information.
  • If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You’ll need to use Form 1040 with Schedule A, Itemized Deductions. You can’t use Form1040A or 1040EZ when you itemize.
  • If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly.

For more information about these topics, visit You can also get IRS forms and publications at or by calling 800-TAX-FORM (800-829-3676).

Thursday, June 6, 2013

Have accounts overseas? Reporting deadlines approach!

For those with foreign financial accounts, it's very important that reporting deadlines aren't missed.  Don't forget there are BOTH IRS and Treasury Department filing requirements.

Here is IR-2013-54 from the IRS, which details some of the requirements:

Issue Number:   IR-2013-54

IRS Reminds Those with Foreign Assets of U.S. Tax Obligations

WASHINGTON – The Internal Revenue Service reminds U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2012, that they may have a U.S. tax liability and a filing requirement in 2013.

The filing deadline is Monday, June 17, 2013, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get two additional days because the normal June 15 extended due date falls on Saturday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for additional information additional information on extensions of time to file.

Nonresident aliens who received income from U.S. sources in 2012 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 17 depending on sources of income. See Taxation of Nonresident Aliens on

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2012 must file Treasury Department Form TD F 90-22.1. This is not a tax form and is due to the Treasury Department by June 30, 2013. For details, see Publication 4261: Do You Have a Foreign Financial Account? Though this form can be filed on paper, Treasury encourages taxpayers to file it electronically.

Taxpayers abroad can now use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $57,000 or less can use brand-name software to prepare their returns and then e-file them for free.

Taxpayers with an AGI greater than $57,000 who don’t qualify for Free File can still choose the accuracy, speed and convenience of electronic filing. Check out the e-file link on for details on using the Free File Fillable Forms or e-file by purchasing commercial software.

A limited number of companies provide software that can accommodate foreign addresses. To determine which will work best, get help choosing a software provider. Both e-file and Free File are available until Oct. 15, 2013, for anyone filing a 2012 return.

Any U.S. taxpayer here or abroad with tax questions can use the online IRS Tax Map to get answers. An International Tax Topic Index page was added recently. The IRS Tax Map assembles or groups IRS forms, publications and web pages by subject and provides users with a single entry point to find tax information.