By: Martin M. Shenkman, CPA, MBA, JD

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).

  • 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).
  • Who suggested the entity be formed (you want more than just tax reasons)?
  • 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)?
  • When were assets transferred to the entity (the more time between transfer and death the better)?
  • What was the descendant'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)?
  • Were transfers made under a power of attorney (its better for the parent to sign assignment documents themselves then under a POA)?
  • 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).
  • 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)?
  • 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.

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