FLP/LLC Audit

FLP/LLC Audit:

Is
your FLP/LLC audit ready? An IRS audit of an estate owning an LLC asked for the
following items: List of all owners since inception (legal documents should
support any member joining/leaving the LLC, more owners may support the
business purpose of the LLC).

o Distributions to owners
since inception (pro-rata distributions demonstrate respect for the LLC form;
too many distributions or distributions tracking personal expenses of the
owners make the entity look superfluous).

o Who suggested the entity
be formed (you want more than just tax reasons).

o Was the creation of the
LLC a matter of negotiation (trusts with independent trustees with fiduciary
obligations as members, or non-family members, or a charity as a member, may
give more credibility then just mom and dad as members).

o When were assets
transferred to the entity (the more time between transfer and death the
better). o What was the decedent’s age and health when the LLC was formed (the
younger and healthier the better; get a copy of a recent medical report on
those setting up the LLC to show that the LLC wasn’t set up in anticipation of
death).

o Were transfers made
under a power of attorney (its better for the parent to sign assignment
documents themselves then under a POA).

o Copies of all LLC
records (if it’s a real business entity it should have records. Regular Quicken
reports are a good thing). Minutes of LLC meetings (although not required by
law, since the IRS asks for them, have meetings and sign minutes corroborating who
attended and what was discussed).

o How, when and by whom
were LLC assets acquired and used (personal use assets, such as a parent’s
home, never belong in an LLC). o How were assets managed before contribution to
the LLC and after (to avoid the IRS argument that assets were merely “recycled”,
there should be a change in management responsibility after contribution that
you can demonstrate).

There are pages more of questions by the
IRS on the audit, but you should get the drift. Be a Boy Scout and “Be Prepared”
for your FLP/LLC audit.