In the Bipartisan Budget Act of 2015 (the “Act”), which became law in November 2015, significant changes in the way IRS partnership audits will be handled were enacted. The changes affect partnerships, limited liability companies and other entities and legal relationships classified as partnerships for U.S. federal income tax purposes. New rules relating to IRS partnership audits became effective for all partnership taxable years that begin on or after January 1, 2018. One very significant change under the new rules is that the concept of a “tax matters partner” under the prior rules has been replaced with that of a “partnership representative.” Under the prior rules, a tax matters partner had the ability to bind the partnership in connection with an audit, but the tax matters partner could not bind the partners in the partnership. Also, a partner who is not the tax matters partner had notification rights and the right to participate in proceedings during an audit. Under the new rules, the partnership representative will serve as the sole point of contact between the IRS and the partnership during an audit, all partners are bound by the partnership representative’s actions in connection with an audit and no partner (who is not the partnership representative) may participate in a partnership audit proceeding. Please note that small partnerships may elect out of the new rules for a particular tax year. In order to qualify for the opt out for a particular year (i) a partnership must be required to furnish 100 or fewer Schedules K-1 partners and (ii) all of the partners in the partnership are individuals, U.S. and non-U.S. C corporations, S corporations and estates of deceased partners. Partnerships must designate a “partnership representative” in the partnership’s tax return for partnership taxable years that begin on or after January 1, 2018 (if no partnership representative is designated the IRS may select any person to serve in that capacity). Because of this, it is not necessary for partnerships to amend their partnership (or operating) agreements to designate a partnership representative or provide procedure around the designation. However, because of the significant authority granted the partnership representative under the new rules, partners would be wise to consider amending their partnership (or operating) agreements in light of the new rules. For instance, for many partnerships, provisions similar to those limiting the authority of a manager in an operating agreement would make sense. Also, many partnerships may want the partners to have the right to approve of certain actions or decisions of the partnership representative, or to receive notice of certain actions. Finally, provisions regarding the selection, removal and replacement of the partnership representative should be included in the partnership (or operating agreement). As always, please do not hesitate to contact me if you would like to discuss or have questions about the impact on your business.