Taxpayers often ask their taxpayer how can a partnership elect out of the centralized partnership audit regime. This tax blog article provides an overview of that process. The Bipartisan Budget Act of 2015 (the BBA) created the new centralized partnership audit regime. BBA was modified by:
• The Protecting Americans from Tax Hikes Act (the Path Act) (December 2015); and
• The Tax Technical Corrections Act of 2018 (TTCA) (March 2018).
Under the centralized partnership audit regime, the audit is conducted at the partnership level. This applies to all partnerships unless they are eligible to and timely elect out of this regime. There isn’t a small partnership exception similar to that under TEFRA. Accordingly, all partnership-related items are determined in the partnership proceeding.
The centralized partnership audit procedures begins with the IRS mailing a Notice of Administrative Proceeding (NAP). Only Partnership and Partnership Representative required to receive NAP. Partners do not have a right to participate in the audit.
Eligibility to elect out
Partnerships with 100 or fewer eligible partners are eligible to elect out of the centralized partnership rules. Moreover, the 100 eligible partnership test is Based on number of K‐1s required to be furnished.
Eligible Partners are:
- Individuals (and estates of deceased partners),
- C Corporations (including any foreign entity that would be treated as a corporation if domestic), and
- S Corporations
Ineligible Partners are: nominees, trusts, DEs, partnerships, estate other than deceased partner. Notice 2019‐6: special rule for QSub partners.
If a partnership makes an election out, then the IRS must propose adjustments, assess, and collect from each partner individually.
Important Considerations for the Centralized Partnership Audit Regime
A partnership must consider whether to elect out of the centralized partnership audit regime, whether it is eligible to do so, how to make the election, and access to information and control of an IRS audit. In addition, the partnership must select a partnership representative that is an eligible entity or individual. In addition, the partnership and partners must abide by the consistency rule. However, if the partners decide to file inconsistently, they should use form 8082. The audit will end with a notice of proposed partnership adjustment. This form will calculate the imputed underpayment. The partnership must determine whether to request an modifications to the imputed underpayment.
If your partnership has received an audit letter, contact Disparte Tax Law today to discuss how to prepare and how to respond to the IRS.