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:
- It has 100 or fewer partners.
- All are considered eligible partners.
Eligible partners are any of the following:
- 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.