On January 18, the U.S. Treasury Department proposed regulations pertaining to tax audits for large partnerships. These rules also apply to limited liability companies and other business entities treated as partnerships for federal tax purposes.
Although the rules aren’t scheduled to go into effect until the 2018 tax season, it may be important to understand them early to determine the future tax strategy of your organization. Currently, tax assessment and collection is done at the individual partner level. The proposed regulations will replace this system with a “centralized partnership audit regime,” in which partnership audits will be conducted at the partnership level.
The following are some of the aspects to consider regarding the new partnership audit rules:
Electing out of centralized partnership audits
Partnerships can elect out of the centralized partnership regime if they have 100 or fewer partners. Each partner must also be “individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic, S corporations, and estates of deceased partners.” Requests to elect out must be made on a timely-filed partnership tax return.
Partnership representative eligibility
Under the new rules, a partnership representative must be designated for your organization. The partnership representative will act on the entity’s behalf in tax audit matters. The representative doesn’t need to be a partner, but can be any person or entity with a substantial presence in the United States. The designation must be made on the tax forms for each calendar year.
Alternative to payment election
A partnership can elect to push out adjustments to its reviewed year partners rather than paying an imputed underpayment. If a valid election is made in accordance with the new laws, the partnership will no longer be liable. This election must be made within 45 days of the date the final partnership adjustment was mailed by the IRS.
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