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Opt in or out? 3 FAQs about the new partnership audit regime

As partnerships prep for tax season, partners must answer one important question: how does the partnership handle the new partnership regime?

Why the need for a new partnership regime?

In 2015, the Treasury Inspector General for Tax Administration (TIGTA) reported large partnerships did not yield tax revenue. Part of the problem: it was not easy for the Internal Revenue Service (IRS) to move forward with audits. If the IRS determined tax was owed, the agency would seek payment from the partners, not the partnership … no easy task for an agency that is already short staffed.  

Lawmakers passed the Centralized Partnership Audit Regime (CPAR) to help ease this burden. The new regime essentially allows the IRS to impute a tax and penalties on partnerships. 

What does this mean?

Partnerships that elect to participate in the CPAR are wise to designate a Partnership Representative (PR). Once the partnership designates a PR, that individual has the power to act on behalf of the group.

The CPAR may seem like an easy way for the IRS to hold partnerships accountable for their tax obligations. However, there is one potential problem: the IRS could hold the wrong partners accountable for the errors of previous partners.

Let’s say a partnership is audited. The audit shows that three years ago the partnership failed to properly pay its taxes and owes thousands in penalties. The partnership now owes the IRS this bill and likely additional penalties. This is generally true whether the current partners were around at the time of the tax error or not.

Can partnerships opt out?

Yes. Partnerships that meet the following criteria may opt out of this new partnership regime:

  1. The partnership has 100 or fewer partners; and
  2. Partners are all “eligible partners” at all times during the tax year.

Whether or not a partnership should opt out depends on the details and goals of each partnership. As a result, it is best for a partnership to review the pros and cons of each option with a professional before making a decision.

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