Please note: Throughout this article, reference to “partnerships” includes LLC’s taxed as partnerships, and reference to “partners” includes members of LLC’s taxed as partnerships.

For tax years 2018 and beyond, the IRS will begin implementing new audit rules directed at partnerships as part of the Bipartisan Budget Act of 2015.  A primary purpose of the new audit rules is for the IRS to be able to more effectively collect tax deficiencies from partnerships.  The new audit rules are expected to significantly increase the audit rates for partnerships.  It is estimated that the new rules will raise approximately $9.3 billion over the next 10 years.


The Tax Equity and Fiscal Responsibility Act (“TEFRA”) has governed the procedures for auditing partnerships since 1982. Under TEFRA, if the IRS audited a partnership, any federal income tax liabilities remained with the applicable partners rather than the partnership.  Under the old audit rules, the IRS would apply any audit changes to the existing partners and in turn the partners would amend their tax returns to reflect these changes.


For tax years 2018 and beyond, the Bipartisan Budget Act of 2015 and final regulations issued by the Treasury Department in August of 2018 repeal the TEFRA audit rules.  The new rules provide for the assessment and collection of tax deficiencies at the partnership level; i.e., the IRS can now target the partnership itself to collect a tax deficiency.  This is a significant change from the old audit rules which required the IRS to track down individual partners to pay the deficiency.  This change makes the process of collecting tax deficiencies much simpler for the IRS but can lead to significant difficulties and challenges for partnerships.   If the IRS conducts an audit and finds a deficiency, the imputed underpayment is computed based on the highest individual or corporate income tax rate.


The old TEFRA audit rules required partnerships to designate one partner as the Tax Matters Partner.  Under TEFRA, the Tax Matters Partner was functionally limited to acting as a liaison between the IRS and the partners and had limited power to bind partners to the final resolution of an audit.  The new rules replace the concept of a Tax Matters Partner with a Partnership Representative which comes with much greater authority.  Under the new audit regime, the Partnership Representative has sole authority to act on behalf of the partnership. All partners are bound by the actions of the Partnership Representative, and partners have no statutory right to receive notice of or to participate in the partnership-level proceedings.  This is a significant change from the TEFRA procedures, under which partners generally retained notification and participation rights in partnership-level proceedings.

The Partnership Representative is to be designated by the partnership on its annual tax return.  The Partnership Representative may, but is not required to, be a partner of the partnership.  The Partnership Representative must have a substantial presence in the United States, have a U. S. address, and a U. S. Tax ID number.

The new audit regime may present some complications and conflicts for partnerships, but there are options available to deal with the changes.  First, partnerships may elect to “push-out” any tax deficiency.  This means that the partners may decide to shift the assessment to the partners who had an ownership interest in the partnership during the year of the audit.  This election to push out the entity-level adjustments to the members relieves the partnership of any entity-level adjustments. In many cases, this election should be considered to avoid entity-level taxation.  Second, a partnership may be allowed to make an annual opt-out of the new audit rules with its timely filed tax return (Form 1065).  If a partnership opts out, any audit changes would apply to the existing partners and in turn the partners would amend their tax returns to reflect these changes.  The opt-out election is available to partnerships that (a) issue 100 or fewer Schedules K-1 annually, (b) are owned by some combination of individuals, estates of deceased partners, C corporations, and S corporations, and (c) timely file their Form 1065 and check the correct box.  If any partner is another partnership or a trust, then that partner is not eligible, and the opt-out election is not available to the partnership.


Consideration should be given to whether a Partnership Agreement (or LLC Operating Agreement) should be amended in order to deal with the new audit rules.  Specifically, consideration should be given to appointment of a Partnership Representative and inclusion of new provisions regarding the push-out and opt-out options described above.  In addition, consideration should be given to the various rights and duties of the Partnership Representative including notice of and updates on audit proceedings and voting requirements.

Many posts on this blog will make reference to the Uniform Trust Code (the “UTC”), so it’s appropriate to discuss what exactly is the UTC and how it will impact this blog and provide a link back in future posts.

Historical Approach

In the U.S. federal system, both the states and the federal government have the power to enact laws.  Some areas, like immigration and civil rights, are largely covered by federal laws.  Other areas, like divorce and family matters, are primarily covered by state laws.

So, what about trust law?  Trust law falls primarily to the states.  This has left us with a hodgepodge of very different state laws which apply to trusts depending on where a trust is located.  The laws that apply to the administration of a trust that is located in Oregon were very different than the laws that apply to the administration of a trust that is located in Tennessee.

The Push Towards Uniformity Among State Laws

711010main1_dnb_united_states_673Throughout the 1900’s, as American society became more mobile and interstate commerce increased, there were calls for greater uniformity of laws among the states.  In steps the National Conference of Commissioners on Uniform State Laws (NCUSL).

NCUSL promotes uniformity in state laws through the use of Uniform State Laws.  NCUSL drafts a uniform law on a particular area, for example adoption, and then promulgates the uniform law, the Uniform Adoption Act, to the states and encourages the states to adopt the uniform law.  Each state can then decide to adopt the uniform law exactly as it is drafted, adopt a modified version of the uniform law, or simply not adopt the uniform law at all.

The Uniform Trust Code

In 2000, NCUSL drafted a uniform law for trusts, the Uniform Trust Code, and encouraged the states to adopt the UTC.  As the Prefatory Notes to the UTC state, the impetus behind the Uniform Trust Code is the increased use of trusts in estate planning: “This greater use of the trust, and consequent rise in the number of day-to-day questions involving trusts, has led to a recognition that the trust law in many States is thin. It has also led to a recognition that the existing Uniform Acts relating to trusts, while numerous, are fragmentary.”

The goal of the Uniform Trust Code is to provide “precise, comprehensive, and easily accessible guidance on trust law questions. On issues on which States diverge or on which the law is unclear or unknown, the Code will for the first time provide a uniform rule.”

Adoption by the States

As of the date of this post, 31 states and the District of Columbia have enacted a version of the Uniform Trust Code.  The states that have enacted a version of the Uniform Trust Code are Alabama, Arizona, Arkansas, Florida, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.

When the UTC was drafted there were already comprehensive trust statutes in California, Georgia, Indiana, Texas, and Washington.   There are many similarities between the UTC and the comprehensive trust statutes in California, Georgia, Indiana, Texas, and Washington.

How Will the UTC Impact this Blog?

Since the Uniform Trust Code has been adopted in a majority of the states, most of the posts on this blog will look at the administration of trusts through the lens of the UTC.  The trend toward state uniformity in trust law will continue (legislation to adopt a version of the UTC is currently pending in Illinois) and framing the discussion on this blog with the UTC will have the broadest application to trust beneficiaries, trustees, and CPA’s and investment managers who work with trust clients.


rockets-containerWelcome to Matters of Trust, a blog devoted to timely and relevant insight and commentary on trust administration and litigation.  In the posts that follow, we’ll dive in to the latest news, case law, and issues relating to trusts.

My hope is that whether you are a beneficiary of a trust, a trustee, a CPA or investment manager who works with trust clients, or someone simply interested in how trusts are administered well (or poorly), you’ll find content that relates and matters to you.

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Please send me your ideas, comments, and trust related news items, and I will do my best to post about them.  I will also consider guest posts if anyone is interested.  Thanks for joining the conversation here at Matters of Trust!

Robert H. Paine
Oxford, Mississippi