Audits of electing large LLCs.

• Author: Ellentuck, Albert B.
• Position: Limited liability companies

Special audit provisions apply to electing large partnerships or limited liability companies (LLCs). An electing large LLC is one with at least 100 members in any preceding tax year that elects to be subject to the electing large partnership rules. The election applies to the tax year in which made and all subsequent tax years, unless revoked with IRS consent. However, an LLC loses its status as an electing large LLC for any tax year in which it has fewer than 100 members.

Getting Started

Electing large LLCs can treat audit adjustments in one of two ways: 1. Generally, audit adjustments flow through to the members in the year in which the adjustment occurs, not the year to which the adjustments apply. Thus, current-year income, gain, loss or credit will be increased or decreased for any prior-year's adjustment. If an adjustment spans several years, its net amount will be taken into account in the year the adjustment is made. Prior-years' returns are adjusted only if there is an audit change to a member's distributive share. 2. An LLC can elect to forgo a passthrough of the audit adjustment and, instead, make an imputed tax payment; in that case, no member reports any adjustment. The imputed tax paid by the LLC is computed by netting all income and loss adjustments, then applying the highest tax rate (whether corporate or individual) in existence at that time (presently, 35%).

If a large LLC elects to pay the imputed tax, the LLC, not the members, is subject to the interest thereon, as well as any penalties. Interest runs from the due date of the LLC return for the year to which the adjustment applies, to the earlier of the due date for the LLC return for the year in which the adjustment is made or the payment date. Treasury also has the right to set other conditions for making the election, which will generally be designed to ensure the LLC's payment of the imputed tax. Any payment of such imputed tax, interest or penalty by an electing large LLC is nondeductible.

Example

High-N-Mighty LLC has 110 members. The IRS examines its 2004 return in 2007. As a result of the audit, the IRS proposed an adjustment to increase 2004 income by $100,000. In addition, the IRS determined the LLC had improperly expensed a $25,000 item in 2004 that should have been amortized over five years. The LLC does not elect to pay the imputed tax described in #2 above. The entire $100,000 adjustment to increase income is passed through to the members in 2007. Only the...