Centralized Partnership Audit Regime is in Effect: Partnerships Should Address these Rules Now
For tax years beginning after December 31, 2017, a new centralized partnership audit regime generally applies to businesses taxed as partnerships for federal income tax purposes, and, with the exception of eligible partnerships that elect out of the centralized partnership audit regime, any imputed underpayments will be assessed at the partnership level rather than at the partner level. See our previous client alert for additional background information on the centralized partnership audit regime.
The Internal Revenue Service recently published draft 2018 instructions to Form 1065, U.S. Return of Partnership Income: https://www.irs.gov/pub/irs-dft/i1065--dft.pdf. Forms 1065 prepared for 2018 will need to address the centralized partnership audit regime and partnerships will be required to designate a partnership representative or, if an eligible partnership that desires to do so, elect out of the centralized partnership audit regime. Entities taxed as partnerships that have not yet amended their partnership or operating agreements to address the centralized partnership audit regime and, if required to do so, appoint a partnership representative, should do so prior to filing their 2018 Form 1065. For calendar year partnerships, 2018 Forms 1065 are due on March 15, 2019.
In addition, if they have not already done so, entities that are eligible partnerships should consider amending their partnership or operating agreements to include language requiring the partnership to elect out of the centralized partnership audit regime, and may wish to contractually prohibit the transfer of any partnership interest to a partner that would make the partnership an ineligible partnership. A partnership is an eligible partnership for the applicable tax year if it has 100 or fewer eligible partners. Eligible partners are individuals, C corporations, S corporations, foreign entities that would be C corporations if they were domestic entities, and estates of deceased partners. Ineligible partners for the opt-out rule are expansively defined and businesses taxed as partnerships with even one partner that is a trust (including a grantor trust that is frequently used for estate planning purposes), disregarded entity, or another partnership is ineligible to elect out of the centralized partnership audit regime.
The centralized partnership audit regime has significant implications for businesses that are taxed as partnerships that should be addressed proactively. Please contact one of the authors or your regular Koley Jessen contact with any questions.