IRS Audit & Partnership

[Nick B.]

Hello BP,

I am considering partnering with an individual who is bringing me a deal (apartment complex).

However, he told me that he is being audited by IRS. Is this a deal breaker for me?

I am concerned that IRS can go after this partner and that somehow will affect the entire partnership. Another question is lender's reaction to this issue. Would a lender (Fannie or Freddie) automatically disqualify us? Last but not least are potential investors - are they going to pass on the deal when they see that one of the GPs are being investigated by the IRS?

Thanks
Nick

[Michael Plaks]

You do not need to formally partner with him. In fact, I would recommend that you do not make him (or anyone else) an equity partner unless you must. Too many reasons, and his IRS problems just add another reason to avoid it.

Instead, just have an agreement on his compensation once the deal is sold. Assuming he will not demand an equity stake.

Clarification: being audited is not a problem on its own - for you or for the lenders. However, if he loses the audit and is unable (or unwilling) to pay the IRS - then it can become a problem.