Ready or not, new audit rules relating to the Centralized Partnership Audit Regime are now in effect. As a result, decisions need to be made for preparation and filing of a partnership’s 2018 income tax return to occur. But what is the Centralized Partnership Audit Regime and what is the impact?
The 2015 Bipartisan Budget Act (BBA), which repealed The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and created the Centralized Partnership Audit Regime, caused an initial wave of discussion and guidance. Between 2015 and 2018, four sets of regulations on the new rules were proposed and subsequently withdrawn. Taxpayers are currently operating under the fifth set of proposed regulations, issued in August of 2018. Furthermore, this was not the only recent change to tax law. In addition to the BBA, there have been many updates to other parts of the tax regime, including the sweeping Tax Cuts and Jobs Act (TCJA) in 2017. Because of the difficulty of processing many new laws and understanding multiple sets of proposed regulations, it is possible that the new audit rules were put aside to be digested later. With the guidelines in effect for tax years beginning January 1, 2018, the time to learn the rules and make decisions for your partnership is now.
What are the changes in general?
In the event of a deficiency assessed during an audit, the partnership itself will now be responsible for paying all taxes, interest, and penalties. This means that, indirectly, the burden will be borne by current partners, regardless of whether they were partners in the year under audit. Partnerships who would like an alternative to this treatment can file a “push-out” election, to essentially “push-out” the assessment to the partners. Another change is that the tax matters partner is replaced with a partnership representative. The partnership representative is not required to be a partner in the entity. Some partnerships are choosing to have an advisor assume this role. The decision is not one to be taken lightly, as the partnership representative is the only one with authority to bind the partnership with the IRS, in everything from signing a Power of Attorney to filing the “push-out” election mentioned above.
Certain small partnerships can opt out of the new regime altogether. In order to do so, the partnership must file no more than 100 K-1’s, and the entity can only be owned by individuals, estates of deceased partners, or corporations. Owners cannot be trusts, disregarded entities, or other partnerships. Because a qualified sub-chapter S subsidiary (QSUB) is technically considered a C Corporation under the code, even though it is a disregarded entity, it is an eligible partner for purposes of this rule. If an S-Corporation is an owner, the shareholders of that corporation are counted toward the 100-owner rule, and, additionally, must be disclosed on the partnership return.
In conclusion, if you or your advisor have delayed making partnership decisions relating to the new audit rules while you studied the TCJA or for another reason, remember that the regime is effective now and related decisions need to be made. If you have any questions regarding the Centralized Partnership Audit Regime, please contact your CSH advisor.