New federal rules taking effect in 2018 that will affect partnerships and limited liability companies have prompted law firms to alert clients that they should review and amend their governing documents and designate a partnership representative in case of an audit by the IRS.

At least one firm, McDonald Hopkins, has created an entire program to address the changes that partnerships and limited liability companies may need to make. These businesses must elect a “partnership representative” who will have sole decision-making power for the company and all shareholders in discussions with the IRS. Those decisions include whether the partnership or a particular partner will pay any underpayment in taxes the audit finds. Partnerships that don't designate a partnership representative will have one designated by the IRS.

“This person who serves as partnership representative has unfettered authority to act on behalf of the partnership,” said Jordan August, an associate at Carlton Fields Jorden Burt in Tampa who has been working with clients on the issue along with shareholder Cristin Keane. “It has become such an issue with partnerships because the new act gives all this authority to the partnership representative. It is imperative that the contractual terms of your partnership or LLC cover and address the manner in which the partnership representative will act on behalf of the partners in the event of an audit, including whether a push out election will be made. In the event that an additional tax is assessed, who will ultimately bear the burden of paying those additional taxes?”