On Dec. 8, the IRS released final regulations affecting special enforcement matters that involve the centralized partnership audit rules, including clarifications about scenarios when those rules do not apply. The final regulations generally apply to partnership taxable years ending on or after Nov. 20, 2020. While these final rules may not alter the fundamental workings of the centralized partnership audit rules, they tidy up some unanswered questions and address concerns about potentially troublesome audit situations.
The Bipartisan Budget Act of 2015 revamped the manner in which the IRS conducts examinations of partnerships and the manner in which partnerships self-correct previously reported items. The general thrust of the centralized partnership audit rules is to create a more streamlined process to post adjustments to partnership items, such as requiring the partnership to pay tax on unfavorable adjustments at the entity level unless the partners agree to pay and disclose their respective portions of such adjustments at the partner level. These rules first applied to partnership tax years beginning after Dec. 31, 2017.
Special enforcement matters that move beyond typical audit scenarios had been an area of concern for the IRS in its conduct of a partnership examination. These special enforcement matters include criminal investigations, jeopardy assessments, and termination assessments. Another such matter involves situations where there is a non-partnership examination of a partner that ends up requiring an adjustment to a partnership item. The final regulations from Dec. 8 provide that the IRS may choose in these special circumstances to apply alternative examination rules as necessary for the effective and efficient enforcement of the Internal Revenue Code (such as adjusting a partnership-related item for the partner as part of a criminal investigation or as part of making a termination or jeopardy assessment).
The Dec. 8 final regulations also provide that a partnership that ceased to exist (or is deemed to have done so) may still elect to “push out” examination adjustments to its partners (in a similar manner to circumstances where the partnership is not confronted with that scenario). Also, the regulations specify that a partnership with any partner that is a qualified Subchapter S subsidiary will not be eligible to elect out of the centralized partnership audit rules. Certain partnerships are eligible to make this election when they have 100 or fewer partners and each partner is of a specified type.
Among other miscellaneous items addressed by the final regulations is the manner in which adjustments to non-income items are accounted for when the partnership pays tax at the entity level, or when the partnership elects to push out adjustments to its partners. And, in special enforcement matters, the IRS may apply the statute of limitations at the partner level instead of at the partnership level.
In summary, the Dec. 8 final regulations clarify lingering questions concerning the impact of adjustments to non-income items and provide more equitable examination options when there are matters of special enforcement present. Although these final regulations are not anticipated to impact the more mundane aspects of the centralized partnership audit rules, they may be highly relevant to certain partnerships in these unique circumstances. If you would like to learn more about scope and impact of these final regulations, please contact us.
Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).