Partnership Tax Audits: Preparing to Deal with the IRS

Posted in News, Offshore Account Update on April 14, 2023 | Share

Is the Internal Revenue Service (IRS) auditing your partnership? If you have received a Notice of Selection for Examination (IRS Letter 2205-D), you need to be prepared. IRS partnership audits can present substantial risks, and Partnership Representatives must work closely with the partnership’s counsel to execute a strategic defense.

When facing an IRS partnership audit, preparation is critical for avoiding unnecessary assessments, interest and penalties. Here are five steps that partnerships can (and generally should) take after receiving a Notice of Selection for Examination:

5 Steps to Take When Facing an IRS Partnership Audit

1. Review the Notice of Selection for Examination (IRS Letter 2205-D) Carefully

Upon receiving a Notice of Selection for Examination, the first step is to review the letter carefully. The letter will specify the tax years that are subject to the audit—and knowing which years’ returns are under review will inform the partnership’s next steps.

2. Review the Partnership Agreement

After reviewing the Notice of Selection for Examination, the next step is to review the partnership agreement (or operating agreement in the case of a limited liability partnership). With the enactment of the Bipartisan Budget Act (BBA) in 2017, the IRS adopted new rules for partnership audits. Under these rules, partnerships must designate a Partnership Representative to serve as the partnership’s primary point of contact during the audit process.

The partnership agreement or operating agreement (or amendments to the document) should identify the Partnership Representative. If this is not the case, then the partnership’s managing partners will need to consult with legal counsel regarding appropriate next steps.

3. Establish Internal Controls and Lines of Communication

When dealing with the IRS, partnerships should follow internal controls and adhere to established lines of communication that ensure an appropriate and organized response. Generally, if a Partnership Representative has been designated, this representative will communicate with the partnership’s legal counsel, who will in turn communicate with the IRS.

4. Conduct an Internal (and Attorney-Client Privileged) Tax Audit

Prior to dealing with the IRS, partnerships should conduct an internal tax audit to assess their risk in the IRS’ inquiry. Importantly, they should do so under the oversight of their outside counsel to ensure that the internal audit’s findings are protected by the attorney-client privilege.

5. Schedule a Time to Meet with the IRS

As the IRS notes, upon the receipt of a Notice of Selection for Examination, the Partnership Representative should “[c]all the IRS contact person listed on Letter 2205-D by the specified date to schedule an initial examination appointment.” Partnership Representatives should work with their partnership’s counsel to approach this communication strategically and prepare for the next steps in the process.

Schedule an Appointment with Tax Attorney Kevin E. Thorn in Washington D.C.

Tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, has extensive experience representing partnerships in IRS audits. If you have received a Notice of Selection for Examination from the IRS, you can call 202-349-4033, email or contact us online to arrange a confidential consultation.

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