Partnerships starting 2018
Enacted November 2, 2015, the Bipartisan Budget Act of 2015 changed the partnership audit rules, projected to raise $10 billion to balance this budget. The mandated effective date is with the 2018 Form 1065 Partnership and LLC tax filings Earlier adoption by the entity is allowable for 2016 and/or 2017 and for some short-year 2015 entities. see Election into the Partnership Audit Regime Under the Bipartisan Budget Act of 2015.
The thee audit rules that are still allowed to be in effect though the 2017 tax returns are:
- Entities with more than 10 partners are audited under the TEFRA procedures and the entity’s audit results are then binding on each individual partner, without any opportunity for an individual appeal.
- Entities with more than 100 partners that elected to be treated as Electing Large Partnerships (ELP) are similar to TEFRA, but the partners adjustment is reported on his current-year tax return, rather than an amended return for the year that was under examination.
- Entities with less than 11 partners are audited as part of each individual partner’s own personal audit.
Effective with 2018, TEFRA and ELP are repealed. IRS examinations will result in any taxes being payable by the entity itself, and not payable by each individual partner, as was the case in each of the above procedures. This change can have significant consequences for partners, especially those exiting or entering or merging with an existing entity structure.
For numbers 1 & 3 above, there is an opt-out process.
The “Tax matters partner” is passé and is being replaced with a “Partnership representative”
Partners do not have joint and several liability for the partnership-level liability
Election out of centralized partnership audit regime. A partnership can elect out of the centralized partnership audit regime if it has 100 or fewer partners during the year and all partners are eligible partners. Eligible partners include individuals, C corporations, eligible foreign entities, S corporations, or the estate of a deceased partner. A partnership has 100 or fewer partners if it is required to furnish 100 or fewer K-1s during the year. Unlike the TEFRA rules, a husband and wife are not treated as a single partner for purposes of this 100 or fewer partner rule. By electing out of the centralized partnership audit regime, the IRS must assess and collect additional taxes and penalties at the partner level rather than the partnership level. The proposed regulations detail the procedures for which a partnership can make such election. It is expected that the Form 1065 instructions will also contain the details on how to make such election.
In general, the centralized partnership audit regime applies to all partnerships with partnership taxable years beginning after December 31, 2017 for any partnership (domestic or foreign) required to file a return under section 6031. Section 6241(1). Section 6221(b), as added by the BBA, allows eligible partnerships to elect out of the centralized partnership audit regime. The fact that all partnerships are covered by the centralized partnership audit regime unless they elect out distinguishes the centralized partnership audit regime from the TEFRA partnership procedures. Under TEFRA, only partnerships with more than 10 partners and partnerships with at least one partner that is not a U.S. individual, a C corporation, or an estate of a deceased partner are automatically covered by the regime. Section 6231(a)(1)(B) (prior to amendment by the BBA). However, partnerships not automatically subject to TEFRA can make an affirmative election into TEFRA. Section 6231(a)(1)(B)(ii) (prior to amendment by the BBA).
Partnerships that elect out of the centralized partnership audit regime are subject to the pre-TEFRA audit procedures under which the IRS must separately assess tax with respect to each partner under the deficiency procedures under subchapter B of chapter 63. As described in section 2.A. of the Background section of this preamble, enactment of TEFRA was a reaction to the complexity and burden of the pre-TEFRA deficiency procedures in the case of partnerships; however, since TEFRA was enacted, the IRS and taxpayers have identified numerous issues with that regime. The centralized partnership audit regime is intended to simplify TEFRA’s burdensome processes and to increase the IRS’s ability to examine partnerships, particularly large and tiered partnerships, and to make the process of assessing tax resulting from those audits more efficient. The limited opt-out nature of the centralized partnership audit regime, which requires the partnership to take affirmative action to elect out of the regime, increases the likelihood that a partnership will be subject to the more streamlined adjustment, assessment, and collection procedures of the centralized partnership audit regime, thereby increasing the number of partnerships the IRS is able to examine under the centralized partnership audit regime. Limiting the number of partnerships that can elect out of the centralized partnership audit regime to those entities specifically permitted under the statute is necessary to carry out this goal.
There are two conditions that must be met for a partnership to be eligible to elect out of the centralized partnership audit regime. First, a partnership must have 100 or fewer partners. Under the statute, a partnership has 100 or fewer partners when it is required to furnish 100 or fewer statements under section 6031(b), currently Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. (Schedules K-1), for the taxable year. Section 6221(b)(1)(B). For partnerships that have an S corporation as a partner (S corporation partner), special rules under section 6221(b)(2)(A) apply for purposes of determining the number of Schedules K-1 furnished by the partnership. Under that rule, the number of statements required to be furnished by the S corporation partner to its own shareholders under section 6037(b) for the taxable year, currently Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., are taken into account to determine the number of statements furnished by the partnership for purposes of section 6221(b)(1)(B). Section 6221(b)(2)(A)(ii).
Second, a partnership must only have eligible partners. Under the statute, eligible partners are individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic, S corporations, and estates of deceased partners. Section 6221(b)(1)(C). Under section 6221(b)(1)(D)(i), a partnership may elect out of the centralized partnership audit regime only on a timely filed return for a taxable year (including extensions).
A partnership must include, in the manner prescribed by the Secretary, a disclosure of the name and taxpayer identification number (TIN) of each partner of the partnership. Section 6221(b)(1)(D)(ii). In the case of an election out by a partnership with an S corporation partner, the election also must include, in the manner prescribed by the Secretary, a disclosure of the name and TIN of each person to whom an S corporation partner is required to furnish a statement for the taxable year of the S corporation ending with or within the partnership taxable year that is subject to the election. Section 6221(b)(2)(A)(i). A partnership must notify each partner of the election in the manner prescribed by the Secretary. Section 6221(b)(1)(E).
Section 6221(b)(2)(B) permits the Secretary to prescribe alternative identification procedures for foreign partners. The Secretary may by regulation or other guidance prescribe rules similar to the rules applicable to S corporations with respect to any partners not described in section 6221(b)(1)(C). Section 6221(b)(2)(C).