IRS Self-Employment Tax Audits of LLC, LP Members: Kiplinger Tax Letter
Some LLC and LP members who don’t pay SECA taxes are on the IRS’s radar.
Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…
The IRS’s Large Business and International Division has an active risk campaign on the issue of when limited partners and LLC members in professional service firms owe self-employment tax (or SECA tax) on their distributive share of the firm’s income. LLCs and limited partnerships that practice law, medicine, accounting, architecture, etc., are being eyed by IRS examiners, and audits have been ongoing for the past few years. Hundreds of professional service companies have been selected for these SECA audits.
In 2017, the U.S. Tax Court ruled that law firm members who actively participated in an LLC’s operations and in management weren’t mere investors and were liable for self-employment taxes. The lawyers claimed that their interests in the member-managed LLC qualified as limited partner interests, exempting them from SECA tax on their share of the firm’s income. The Court disagreed, saying the lawyers weren’t mere investors in a partnership. Instead, they actively participated in the firm’s business operations by doing legal services and they had management powers
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
SECA Audit Examples in Tax Court
More of these self-employment tax cases are now coming before the Tax Court. Here’s one example involving a limited partnership hedge fund engaged in investment services. On audit, the IRS said that the owners don’t qualify as limited partners for purposes of the SECA rules, and reclassified $141 million of the partners’ income as net earnings from self-employment. The firm filed a petition in Tax Court in 2022. The company is urging the Tax Court to rule that limited partners in state-law limited partnerships are exempt from self-employment tax on their distributive share of partnership income.
A second example involves a state-law private-equity limited partnership that invests in energy and commodities companies. The firm filed its Tax Court petition last month in response to an IRS audit. The agency determined after its exam that five of the firm’s service partners weren’t limited partners for purposes of the SECA rules and reclassified $51 million of the partners’ income over two years as net earnings from self-employment. The partnership argues that the limited partner exception to SECA tax applies to partners who act as both investors and service providers.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.
-
Stock Market Today: Stocks Pop Then Drop After Fed Meeting
Stocks went on a roller-coaster ride after Fed Chair Powell said interest rates were likely at a sufficiently restrictive level.
By Karee Venema Published
-
Fed Holds Rates Steady at 23-Year High: What the Experts Are Saying
Federal Reserve The Federal Reserve struck a dovish pose even as it kept interest rates unchanged for a sixth straight meeting.
By Dan Burrows Published
-
Knowing How to Compute Tax Basis in Your Home Can Save You Money
The Tax Letter Whether you're selling or buying a home, you'll want to know how to compute tax basis. It could save you on taxes when you sell.
By Joy Taylor Published
-
IRS Warning: Beware of Smishing and 'Helper' Tax Scams
Scams Tax season is a time to look out for email and text message scams.
By Kelley R. Taylor Last updated
-
What's Happening With the Employee Retention Credit and the IRS?
Tax Credits Due to fraud, the ERC has received much attention lately from the IRS and Congress.
By Kelley R. Taylor Last updated
-
Should You Let the IRS Do Your Taxes?
Tax Filing The new IRS Direct File program is now open to more taxpayers.
By Kelley R. Taylor Last updated
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax Letter
The Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
By Joy Taylor Published
-
Top 10 Tax Expenditures in 2024: The Tax Letter
The Tax Letter Costly tax breaks will likely come under scrutiny from lawmakers trying to reduce the national debt. We review the 10 largest individual tax expenditures.
By Joy Taylor Published
-
How to Report QCDs on Your Tax Return: The Tax Letter
The Tax Letter Qualified charitable distributions, otherwise known as QCDs, can be tricky when it comes to tax reporting. We've got some pointers to help with filing.
By Joy Taylor Published
-
What to Know About Medical Expenses and Your Tax Deductions: The Tax Letter
The Tax Letter What you need to know about deducting medical costs on your tax return.
By Joy Taylor Published