IRS finalizes rules for opting out of partnership audit regime

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The Internal Revenue Service has issued final regulations for how to elect out of the centralized partnership audit regime that the IRS has begun implementing to deal with large partnerships.

Under the Bipartisan Budget Act of 2015, Congress gave the IRS the ability to audit large partnerships such as hedge funds, private equity firms and major accounting firms, by auditing the firm as a whole as opposed to each separate partner. However, partnerships also have the ability to opt out of the centralized audit regime under the law, and the IRS has now finalized the rules for how they can do it.

The IRS and the Treasury Department issued proposed regulations last June and received 32 written comments in response. Many of the comments deal with determining the number of partners, determining what partners are considered to be eligible partners and the mechanics of making an election to opt out of the centralized audit regime. Under the proposal, a partnership is eligible to elect out of the centralized audit regime if it has 100 or fewer partners for the taxable year and all of the partners are eligible. Some of the comments suggested that statements furnished to certain types of partners should not be taken into account for purposes of determining whether the partnership is required to furnish 100 or fewer statements. Another commenter recommended that statements given to pass-through entities and disregarded entities shouldn’t count toward the 100-or-fewer threshold, and another comment suggested spouses should count as a single partner for that purpose.

The IRS pointed out that the number of partnerships has grown substantially in recent years and is likely to continue to grow, compounding the audit and collection inefficiencies with each expansion of the eligible partner list. “It would undermine the benefits of the new regime to expand the group of partnerships that are eligible to elect out of the new regime. Moreover, it would be unwise to do so at a time before the first returns for taxable years subject to the new regime have been filed. There may be some situations where expanding eligible partners would not add significantly more complexity to an examination, even under the deficiency procedures. However, while this may occur in some instances, the rules under section 6221(b) are designed to be of general applicability to all partnerships, regardless of size and composition of partners.”

The final regulations affect partnerships for taxable years starting after Dec. 31, 2017.

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Tax regulations Partnerships Tax audits IRS