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With more than 6 million S Corporation returns filed each year, we'll break down the
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Partnerships account for over 5 million returns filed annually, and each one comes with its own set of moving parts. Members change, operating agreements fall out of date, and multi-state filing obligations shift as the business evolves. Getting the numbers right on Form 1065 starts with making sure you have the full picture before you begin.
To help you stay ahead of the curve, we pulled 10 questions directly from our Federal Tax Update to give you a checklist for partnership and LLC tax return preparation. Whether you’re onboarding a new client or working with one you’ve served for years, these questions will help you to avoid costly issues before they become problems on a filed return.
1. Have any new members/partners been admitted to the LLC/partnership?
New partner admissions affect how income is allocated on Schedule K-1 and may trigger Section 754 elections. You’ll also need to know the type of interest held by each new member—capital interest, profits interest, preferred interest, etc.—since different interest types carry different tax consequences.
2. Are there any updates to existing member/partner’s information?
Every Schedule K-1 must include accurate partner details. Mismatched Social Security numbers trigger IRS notices, and wrong addresses mean K-1s don’t reach partners in time for their personal filings. A quick verification of a partner’s personal information at the start of the engagement prevents hiccups down the line.
3. Is the LLC considering (or has it made) any tax elections during the year? For example, has the LLC filed Form 2553 to be classified as an S corporation or Form 8832 to be classified as a C corporation?
Entity classification elections change how a return is prepared and how income flows to its members. Any domestic unincorporated entity, including LLCs and partnerships, can elect to be treated as a corporation—but the process requires careful attention to timing and eligibility rules. Missing a deadline or filing incorrectly can be expensive to fix.
4. Has the LLC’s operating agreement been updated to reflect any of the above changes?
The operating agreement governs how income, losses, and distributions are allocated among the members. When changes happen—new members, revised profit-sharing arrangements, entity elections—the operating agreement needs to reflect them. Mismatches between the agreement and actual business practices create compliance exposure, particularly when distributions don’t align with what the agreement prescribes.
5. Does the LLC/partnership want to elect out of the Centralized Partnership Audit Regime? If so, is that information reflected in the LLC’s operating agreement?
The Centralized Partnership Audit Regime, established by the Bipartisan Budget Act of 2015, allows the IRS to assess and collect tax directly from the partnership rather than from individual partners. Eligible partnerships with 100 or fewer qualifying partners can elect out on a yearly basis. This decision should be reflected in the LLC’s operating agreement, and all partnership clients should review their agreements with an attorney to address the audit rules.
6. Has there been a change to the Partnership Representative (or Tax Matters Partner)?
Under the BBA audit rules, the Partnership Representative has sole authority to act on behalf of the partnership and all partners during an IRS examination. Partners have no independent right to challenge adjustments. A recent Chief Counsel Advice memo (CCA 202505027) illustrates why this matters—a partnership lost its ability to contest IRS assessments because the wrong person signed extension forms. If there’s been a change, it must be properly updated through Form 8979.
7. Has the LLC made any distributions during the year that do not align with the LLC’s operating agreement?
Distributions that deviate from the operating agreement can create unexpected tax consequences and may signal deeper compliance issues. It’s worth evaluating how guaranteed payments are being handled—since guaranteed payments are not eligible for the Section 199A qualified business income deduction, some partnerships may benefit from restructuring distributions through profit allocations instead.
8. Were there any transactions between the LLC and its members or related entities? If so, please provide information on how the transactions are reflected in the books.
Related-party transactions require careful documentation and proper reflection on the books. The One Big Beautiful Bill Act included a technical amendment to Section 707(a)(2), clarifying that disguised sale rules are self-executing without final regulations. This means the IRS can more readily recharacterize transactions between partners and their partnerships as taxable sales when the economic substance supports that treatment.
9. In which state(s) does the LLC operate or have nexus? Were all required state registrations filed? If so, please provide the state registration identification number.
Multi-state operations mean multi-state filing obligations. State compliance has become increasingly complex, especially with pass-through entity tax (PTET) elections now available in most states as a workaround for the SALT cap. Under the One Big Beautiful Bill Act, the SALT deduction limitation was made permanent but temporarily increased to $40,000 through 2029, making PTET elections a continued planning consideration for your partnership clients.
10. Has the LLC received any correspondence from the IRS (or state agencies)? If so, please provide copies of the correspondence and any responses.
This is your safety net question. Clients don’t always mention IRS notices or state letters unless you ask directly. While partnership audit rates remain below 0.05%, unresolved correspondence could indicate unreported income, questions about the entity’s classification, or outstanding liabilities that affect the return you’re preparing.
Make These Questions Part of Your Process
Asking your partnership and LLC clients these questions every year keeps your returns streamlined and problem-free. Partnership tax law can be tricky. The IRS is actively watching for centralized audit exposure, operating agreement mismatches, and disguised sale recharacterizations. These 10 questions can help you catch problems early and prepare returns that hold up under scrutiny and keeps a lot of potential for extra work off your plate.
If you also prepare S corporation returns, be sure to check out our companion piece, 12 Questions to Ask for S Corporation Tax Return Preparation Every Year.
These questions and the tax law behind them are covered in depth in our Federal Tax Update, where you’ll find the latest legislative changes, IRS guidance, and court cases shaping partnerships today.
Stay sharp and serve your partnership clients better with self-study and webcast CPE courses that keep you ready for anything that partnership tax return preparations can throw at you:
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