Coordinated Counsel
New Partnership Audit Rules
Transcript
BARRY: The last one I added recently. Number 18. It’s bold on purpose. It’s really important. It’s a little bit dated at this point, but I think it’s worth talking about because I think most businesses are completely ignorant of this new rule. And what we’re talking about here is the new partnership audit rules with the IRS. Are you familiar with those?
CHAD: I’m not. So, you know, I’m going to defer to you on this one and get educated myself.
BARRY: All right. So basically what happened is that the IRS historically would audit a partnership — limited partnerships, LLCs taxed as partnerships, anything taxed as a partnership. There’s a lot of different kinds: LP, LLP, triple-L P, general partnership. There are a lot of kinds. Got to wrap it up, I have a meeting coming at five, forgot about that.
So the IRS would historically assess a deficiency in tax at the partnership level and then they would have to chase the partners. And as you would expect, when you get into sophisticated partnerships, the partners are all made up of different entities, who are made up of different entities, who are made up of different entities, and so forth.
So you really gotta get granular and go through a lot of effort to find the inevitable taxpayer that’s responsible. So better late than never, they finally wised up and said, “OK, no more of this crap. We’re going to assess at the partnership level, and we’re going to collect at the partnership level. We’re not going to go find you at the partners. It makes sense, given that there’s like four people working at the IRS right now. At least you thought it was funny.
And so basically, they’re assessing at the partnership level; they’re collecting at the partnership level. And what they did was– it used to be called a “tax matters partner.” That was the person who was kind of dealing with this in the business. It’s usually an operative unit that has any quality whatsoever. Now it’s called a partnership representative. A partnership representative (PR) is the only person who can talk to the IRS and who can bind the company with the IRS. The only person.
So now what happens is you have this person now talking to the IRS. Maybe they’re negotiating, maybe they’re not. But theres options this person has to benefit the partnership and to benefit the other partners who are not in the conversation. They’re not allowed to be in the conversation. This person, if they make a deal with the IRS, will in fact affect the partners — and the partners have no representation.
CHAD:
You better pick that person wisely then, huh?
BARRY:
I would say pick them wisely, yes. But I’d also say you should build into your agreements this new section that, of course, we’ve developed. And I have not seen one as good. A lot of reputable firms, but I’ve not seen one as good as mine. We really thought it through. We did a ton of research on it and basically developed a provision that says this person who’s responsible for working with the IRS to negotiate and bind the company and the partners has all these obligations to at least disclose, notify, and give all the options.
Every Partnership Should Revisit Its Operating Agreement Now (Yes, Even If You Think You’re “Too Small” for IRS Scrutiny)
By: Barry E. Haimo, Esq.
January 15, 2026
There has been a major shift in how the IRS audits partnerships, and business owners need to understand what that means. The new centralized partnership audit regime doesn’t just change who the IRS talks to, but:
- who carries the financial burden,
- who has negotiating power,
- and how future tax liabilities flow through your business.
Most importantly, it exposes a blind spot that many operating agreements and partnership documents simply were not written to handle.
And that’s where the real risk lies.
Under the old system, the IRS assessed a partnership and then chased individual partners for their share of any tax deficiency. This created inefficiency, especially for complex structures with tiered partnerships and trust ownership. The new rules try to solve that problem by assessing and collecting the tax at the partnership level. But when the IRS simplified its own process, it created a new layer of complexity for partnerships themselves.
The Hidden Risk: One Person Now Holds All the Power
The newly defined “Partnership Representative” (PR) is not just a spokesperson. They are the sole individual empowered to negotiate with the IRS… and bind the entire partnership to the outcome. Partners have no legal right to participate in the conversation, review options, or consent to decisions that directly affect their tax position.
Many business owners assume their operating agreement protects them from internal or tax-related surprises. But unless your documents were drafted or amended after the Bipartisan Budget Act’s audit rules took effect (and unless the drafter explicitly added modern PR language), chances are your agreement doesn’t address any of this.
Without a tailored provision, your PR could:
- Agree to an unfavorable settlement
- Make an election that increases certain partners’ tax exposure
- Fail to notify partners of alternatives that would benefit them
- Bind the entity in ways no one anticipated
And none of the partners (not even majority owners) would have legal recourse if the agreement is silent.
Why This Matters Even for “Simple” Partnerships
Many partnerships assume they are exempt, especially if they’re small or closely held. That, however, is a dangerous assumption. Certain entities such as grantor trusts (common in estate planning and family business structures) are relevant under the new rules. Partnerships with even modest complexity can find themselves squarely within the audit regime.
Silence does not equal safety. In fact, silence in your documents defaults power to the PR and may expose partners to unnecessary tax burdens.
The Real Work: Updating Agreements with Intentional Safeguards
A protective partnership-audit provision should do more than name a PR. It should outline:
- The PR’s duty to notify partners of all IRS inquiries
- Required disclosures of tax elections and settlement options
- Consent thresholds for major decisions
- Procedures for shifting tax burdens to the appropriate partners
- Replacement mechanisms if the PR is unresponsive or conflicted
These protections are not “nice to have.” They are essential governance tools. Without them, partnerships risk internal disputes, inequitable tax outcomes, and significant financial exposure.
What does it all mean? Simply put, partnerships that haven’t revisited their operating agreements in light of the new audit regime are running on outdated assumptions.
The IRS now prioritizes efficiency; you must prioritize protection. Schedule a review of your agreement with counsel familiar with these rules, coordinate with your CPA, and make sure your partnership documents don’t leave your team blindfolded in an audit.
Proactive updates today can prevent expensive surprises tomorrow.
