Highlights of The New Centralized Partnership Audit Regime
The new Centralized Partnership Audit Regime presents numerous challenges, and new reporting requirements for U.S. partnerships. Before filing their 2018 partnership tax returns, partnerships and their partners should seek advice from their professional tax advisors in understanding and analyzing the consequences of these new audit provisions and elections. Here are some key take-aways:
- A central feature of the new regime is that the tax is collected from the partnership rather than the partners.
- Partnerships and their partners, and eligible partnerships will have to decide whether they want to elect out of the new regime now in place for tax years beginning after December 31, 2017.
- The partnership must understand the role and responsibilities of the Partnership Representative (PR), and give careful consideration to who is appointed the PR.
A significant number of partnerships that were previously exempt from the audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) will be now be subject to the new regime. The IRS issued final regulations during 2018, and it is important that partners, partnerships and their advisors be aware of the rules contained in the new regime regarding the way partnerships are audited and how any resulting tax liability is computed, assessed and collected.
Below, you’ll find four important elements that I’m making my clients aware of:
1) Electing Out of the New Regime
Certain eligible partnerships may elect out of the new regime annually, and the election is irrevocable. To be an eligible partnership it must have 100 or fewer partners, and all partners must be considered eligible partners at all times during the tax year.
2) The Partnership Representative
The new regime now requires every partnership to designate a partnership representative (PR). Once designated, the PR will remain in that position until the PR resigns, the PR’s designation is revoked, or the IRS determines the designation is no longer in effect. A separate PR designation is made each year on the partnership’s tax return for the taxable year, and the designation is only effective for that year. The new regime gives the PR complete powers to represent the partnership in most circumstances before the IRS, and the actions of the PR are binding on the partnership and the partners for any matter covered by the new regime.
3) Push-out Election
Instead of collecting the tax from the partnership, the partnership can elect to “push out” any adjustments to its reviewed-year partners. Under the push-out election, the reviewed-year partners must take the adjustments into account at the partner level and report the adjustments on their tax returns for the year in which the push-out election is made, not the reviewed year. Once the partnership makes the push-out election, the partners are bound by the election, and once the election is made for a given adjustment, it can only be revoked with the consent of the IRS.
4) Pull-in Procedure
Under this procedure, the partnership effectively shifts the audit liability to reviewed-year partners rather than the adjustment-year partners without making a push-out election. Within 270 days of receipt of the IRS adjustment, in lieu of actually filing an amended return, a reviewed-year partner pays his share of the partnership’s tax, and then the partnership demonstrates to the IRS that some or all of the reviewed-year partners have been deemed to have amended their reviewed-year tax returns to reflect their share of the audit adjustments and have paid any resulting tax.
A new audit regime like this one has many moving parts, which I addressed in further detail in my article, “The New Centralized Partnership Audit Regime”. It is incumbent on the both the financial officers at these partnerships, and the partners themselves, to be aware of the new regime’s requirements and to take into account both the impact of the new IRS rules and their timeframes. I encourage financial officers and partners to read more and then make time to discuss the new requirements with a tax advisor.
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