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January 16, 2018

IRS Answers Stakeholders' Questions on Electing Out of Centralized Partnership Audit Regime (article)

Final regulations 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.

Take away. In recent weeks, the Tax Cuts and Jobs Act overshadowed the centralized partnership audit regime rules. Like tax reform, the reach of the centralized partnership audit regime is expansive. Countless business entities are impacted by the new centralized partnership audit rules.

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.

Background

The Bipartisan Budget Act of 2015 (BBA) repealed the TEFRA and electing large partnership rules.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.

Comment. The new centralized partnership audit regime rules were added to the BBA as a revenue raiser. According to the Joint Committee on Taxation, the provision would generate $9.3 billion over 10 years.

Election Out

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, consistent with the purpose of the BBA. "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.

Eligible Partners

The IRS explained that an eligible partner is any person who is an individual, C corporation, eligible foreign entity, S corporation, or the estate of a deceased partner. A partner is not an eligible partner if the partner is a partnership, a trust, certain foreign entities, an estate, and certain other entities. The IRS reiterated that it does not intend to expand the list of eligible partners. "Expanding the current definition of eligible partner would result in more partnerships electing out of the centralized partnership audit regime. In turn, this would result in more audits under the deficiency procedures for taxpayers owning interests in partnerships," the IRS explained.

Timely Filed Return

An election out, the IRS added, must be made on a timely filed return. The IRS reported that some stakeholders have asked what is a timely filed return. The final regs clarify that the long-standing definition of a timely filed return applies. "A return is timely filed if it is filed prior to the due date of the return (taking into account any applicable extensions), regardless of whether it is the original return filed by the partnership or a return filed subsequent to the original return but before the extended due date of the return," the IRS explained.

Revocation

The IRS reiterated in the final regs that revocation of election out requires consent of the agency. "If a partnership is able to unilaterally revoke the election, the partnership is changing that representation without the IRS's knowledge which, under certain circumstances, could be detrimental to tax administration," the IRS cautioned.

CommentThe IRS added that it may allow alternative identification foreign partners in the future.

Identification

The IRS also reinforced that partnerships must provide a U.S. taxpayer identification number for all partners. This includes foreign partners as well as domestic partners. "Requiring a U.S. TIN for all partners of a partnership treats all partners the same, regardless of whether they are foreign or domestic, and ensures that the partners of the partnership can be easily identified," the agency explained.

Notification

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 that a partnership does not have to provide notice to the shareholders of an S corp partner because those shareholders are not "its partners" under Reg. §301.6221(b)-1(c)(3). "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," the IRS added.

CommentThe 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 this past week.


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