Centralized Partnership Audit Regime

New Partnership Audit Rules

New audit rules (centralized partnership audit regime) are now in place for all domestic and foreign partnerships for taxable years beginning after December 31, 2017. Partnerships and tax advisors should be aware of these changes and understand the implications.

Tax Equity and Fiscal Responsibility Act – Centralized Partnership Audit Regime

Effective January 1, 2018, the new “centralized partnership audit regime” replaces the current audit procedures enacted under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).

Old Audit Rules

Under the old rules, audit adjustments are passed through and collected at the partner level.

New Audit Rules

The new partnership rules now permit the IRS to examine and assess audit liabilities at the entity level. This single-tiered approach requires diligent planning when structuring ownership interests, modifying existing governing documents and deciding on proper tax elections.

Opting-Out of New Rules

An election to opt-out of the rules of this new regime is available to eligible partnerships.

Generally, a partnership if eligible if:

  1. It has 100 or fewer partners.
  2. All are considered eligible partners.

Eligible partners are any of the following:

  • individuals
  • C corporations
  • S corporations
  • eligible foreign entities
  • estates of deceased partners

The election must be made annually on a timely filed tax return. Without the proper election, the new rules will automatically apply and any underpayments will be calculated at the highest federal income tax rate, currently 37%.

Generally, assessments will not be adjusted for in the year of audit (“reviewed year”). Partnerships under examination will have the option to make a “Push-Out Election”. This allows the entity to pass any assessed liability to the partners in the reviewed year subject to audit rather than to the partners in the concluded adjustment year. This election reduces the exposure for any partners who may not have held interest in the review year.

New procedures under the regime should be reviewed and addressed as soon as possible to comply with the new regulations and strategically manage audit risk at both the partnership and partner levels.

Recent Posts

ENERGY STAR vs. ZERH: Tax Implications

Building a new home is an exciting endeavor, but it can also be a significant financial investment. Fortunately, the federal government offers a tax credit program incentivizing builders and developers to construct energy-efficient homes. This not only benefits the environment, but it can also put more money back in your pocket. This article will guide

Read More »
energy tax incentives

When Should You Consider Energy Tax Incentives?

If you’re exploring energy tax incentives for your next development, you’re already ahead of the game. Surprisingly, many developers overlook significant tax breaks like the 179D deduction—or they miss their chance to claim maximum benefits by not acting early enough. You may think of energy tax incentives such as 179D as a potential bonus to

Read More »
estate planning

Estate Planning for Investors: Unlock Tax Savings with Cost Segregation

Estate planning is essential for a smooth transfer of assets, and it becomes especially complex for real estate investors. To minimize tax burdens and maximize the value of your estate, it’s crucial to understand strategies like cost segregation. This tax-saving tool allows you to reclassify specific property components for faster depreciation deductions, which translates into

Read More »

Contact Us