Centralized Partnership Audit Regime

The ALL new Centralized Partnership Audit Regime is here!

What to do now: Action Steps, Elections, and more

Beginning in 2018 the IRS will now conduct partnership audits at the entity level instead of opening separate audits on each of the individual partners. Consequently, we, along with most tax professionals, recommend that partnerships initiate certain action steps to ensure that the partnership and partners are properly prepared in the event that the IRS does audit the partnership. In particular, partnerships should amend their agreement to clarify how they intend to address the elections and options afforded in the new rules.

• All partnerships should identify a Partnership Representative or the IRS will make the choice.

Each partnership must now have a “Partnership Representative.” The Representative need not be a partner provided the designated entity or individual maintains a substantial U.S. presence.

The Partnership Representative has the sole authority to act on behalf of the partnership and can take actions binding the partnership such as agreeing to settlements, notices of final partnership adjustment, and extensions of the periods for adjustments.

If a partnership does not designate a Partnership Representative the IRS will make that selection upon audit

• “Small Partnerships” can elect out of the application of the new rules.

Partnerships with 100 or fewer partners consisting only of individuals, C corporations, S corporations, eligible foreign entities, or estates can annually elect to opt out of the new partnership audit rules. The rules treat each S corporation shareholder as a deemed partner when applying the “100 partner limitation.” Choosing to opt out results in the IRS conducting audits at the partner level similar to the pre-2018 procedures and rules.

The election to opt out of the new rules may or may not be beneficial depending upon the facts and circumstances. Thus, the partnership agreement should affirmatively clarify the partners’ intent in that regard. Further, the partnership agreement could contain provisions restricting the number and type of partners as well as the ability of partners to change their tax status that can potentially negate the partnership’s ability to opt out of the new rules.

Additionally, the partnership agreement should ensure that its partners will have sufficient access to its books and records in the event they need to substantiate amounts allocated by the partnership in the event of a partner-level audit.

• Address “Push-Out” Election in your partnership agreement.

The new rules allow a partnership to elect to “push-out” an imputed underpayment assessed to the partnership to only those partners who held a stake in the partnership during the reviewed year. Pushing out the imputed underpayment ensures that only those partners with an ownership interest during the year in question retain responsibility for their respective shares of the imputed underpayment. In contrast, foregoing the “push-out” election results in the partnership (essentially the current partners) remitting payment to the IRS for the imputed underpayment. Furthermore, the IRS will generally calculate the underpayment using the highest individual marginal tax rate rather than the tax rates as they apply to the individual partners as is the case under a “push-out” election.

The partnership agreement should therefore provide an affirmative indication of whether and under what circumstances the partnership will choose to push-out the underpayment to its partners. The agreement can also indicate whether or not the Partnership Representative has the sole authority to make that decision.

The partnership should retain the services of an attorney to assist it in amending its agreement to address these new audit rules. Look for more articles on the centralized partnership audit rules as their implementation moves forward throughout 2018.

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas. https://www.linkedin.com/in/drquintana