Final regulations just issued by the IRS help clarify electing out of the new centralized partnership audit regime. As of January 1, 2018, the new centralized partnership audit regime rules now govern partnerships.
Comment. Like tax reform, the centralized partnership audit regime rules have consumed significant resources at the IRS. These final rules, while covering many provisions, still leave some questions to be answered by future guidance.
Comment. The American Institute of CPAs (AICPA) has called on Congress to delay the start of the new centralized partnership audit regime for one year. “Treasury and the IRS have not provided all of the necessary procedures and guidance for taxpayers to make informed decisions,” the AICPA told lawmakers in early January. So far, Congress has not acted on that recommendation.
The Bipartisan Budget Act of 2015 (BBA) repealed the TEFRA and electing large partnership rules. In their place, the BBA provides a streamlined structure for auditing partnerships and their partners at the partnership level.
Under the streamlined procedures, the IRS examines the partnership’s items of income, gain, loss, deduction, credit and partners’ distributive shares for a particular year of the partnership (the so-called “reviewed year”). Any adjustments would be taken into account by the partnership in the year that the audit or any judicial review is completed (the so-called “adjustment year”). The final regs make a number of clarifications to proposed regulations issued June 14, 2017.
Partnerships with 100 or fewer partners generally may elect out of the new audit regime. The final rules describe in detail eligibility for electing out and procedures for electing out. However, the IRS cautioned that electing out would have limitations. “The centralized partnership audit regime is designed to improve upon both the TEFRA rules and the deficiency procedures by providing for a centralized audit proceeding with respect to the partnership and mandating centralized assessment and collection of tax, penalties, and interest from the partnership. It follows then that rules designed to limit the number of partnerships that can elect out of the new regime is consistent with this objective,” the IRS explained.
The partnership also must notify its partners. This notification, the IRS explained, must take place within 30 days of making the election.
The IRS clarified, however, that a partnership does not have to provide notice to the shareholders of an S corp partner because those shareholders are not “its partners.” “It should be sufficient that the partnership notify its partner, the S corporation. Whether and how the S corporation wishes to notify its shareholders is something that is left to the S corporation and its shareholders to determine,” according to the IRS.