There are some LLC and LP members who don’t pay SECA taxes that are now on the IRS’s radar.
The IRS has an ongoing audit campaign on when limited partners and LLC members owe self-employment tax on their distributive share of the firm’s income.
In 2017, the Tax Court ruled that law members who actively participated in an LLC’s operations and in management weren’t mere investors and were liable for self-employment taxes.
LLC and LP owners in law, medicine, accounting, architecture and other service sectors are being eyed by IRS examiners, and audits have been ongoing the past few years.
Here is an example involving a limited partnership engaged in consulting. On audit, IRS said that the five owners don’t qualify as limited partners for purposes of the SECA rules and reclassified the firm’s consulting income as net earnings from self-employment. The firm contests this and has filed a petition in Tax Court.
My guess is the IRS will win, they seem to only take on cases they expect to win.