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Want to Elect Out of the New IRS Partnership Audit Rules? Here’s How


Partnerships and partners take note: the IRS has changed the way you are audited, and it may impact your 2018 tax return. Under the old rules, partnership items were examined at the partnership level, but assessment and collection was pursued at the partner level. Under the new regulations issued December 21, 2018, the assessment and collection of taxes related to a partnership audit will occur at the partnership level unless the partnership elects out of the new audit and collection regime.

The IRS is now authorized to collect from the partnership any tax deficiencies arising out of the partnership operations for a taxable year, even if the partners for the year of the deficiency are different from the partners in the year the deficiency is assessed. Moreover, the tax resulting from such adjustments will be computed at the higher of the top individual rate or the corporate rate.

Partnerships that want to elect out of the new audit rules must fulfill the following requirements:

  • The partnership must have fewer than 100 partners (with each shareholder in an S” corporation who is a partner being treated as a partner).
  • Only the following can be partners (partnerships that have a partnership, a trust or a disregarded entity as a partner cannot elect out)
    • Individuals
    • S corporations
    • C corporations
    • Estates of a deceased partner
  • Each partner must be notified of the election
  • On page three of Form 1065, question 25, the box must be checked yes
  • Form 1065, Schedule B-2 must be completed listing each partner and each shareholder in an S corporation that is a partner

Partnerships also are no longer required to designate a tax matters partner. Instead, if a partnership does not elect out of the new centralized partnership audit regime, the partnership must designate a partnership representative. This individual or entity will have the sole authority to act on behalf of the partnership in the event of an audit. The name of the partnership representative, his or her address, ID number and phone number must be listed at the bottom of page three on the Form 1065.

If a partnership does not elect out of the new audit regime and the IRS adjusts a return, the partnership can make a “push out” election, under which each reviewed year, the partner – not the partnership – is required to pay his or her share of the underpayment.

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