Electing out of the new partnership audit rules

Among the myriad tax law changes that came into effect for the 2018 taxable year is the Centralized Partnership Audit Regime, enacted as part of the Bi-Partisan Budget Act of 2015.

The Centralized Partnership Audit Regime replaces the previous Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and Electing Large Partnership (“ELP”) rules and is broadly applicable to all partnerships unless a timely election to opt out of the new regime is filed.

The Internal Revenue Service recently released a final version of Form 1065, Schedule B-2, Election Out of the Centralized Partnership Audit Regime that must be filed annually for each taxable year beginning after December 31, 2017 for which the partnership is eligible, and wishes, to opt out of the new regime.

Eligibility to Opt Out

The election to opt out of the new regime is available to partnerships with 100 or fewer partners, provided each partner is either an individual, C-corporation, S-corporation, foreign entity taxed as a corporation for US federal tax purposes, or estate of a deceased partner. In other words, no partner is a partnership, disregarded entity, or trust (including a grantor trust).

Making the Election

Completing Form 1065, Schedule B-2 requires providing a list of each partner, the partner’s taxpayer identification number, and their eligible status (individual, c-corporation etc.). The election will be made by attaching this schedule to the timely filed Form 1065 for the relevant year.

Consequences of Opting Out

Partnerships that opt out of the centralized partnership regime will be subject to audit/refund procedures at the partner level, rather than the partnership level. This may create significant administrative complications, particularly in partnerships with a large number of partners that can no longer look to the partnership to make a refund claim on behalf of the partners.

It is important that consideration be given to the particular facts and circumstances of each partnership when deciding whether or not to opt out. While remaining subject to the regime may provide administrative simplicity, it is possible that the economic burden of adjustments under the regime may shift to current-year partners, rather than those holding interests in the examination year.

Please contact your Mazars USA LLP professional for additional information.

Published on: March 1, 2019

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.