The Bipartisan Budget Act (BBA) of 2015 was signed into law on November 2, 2015. This law replaced the auditing and tax collection procedures for partnerships under the Tax Equity and Fiscal Responsibility Act of 2018 (TEFRA) with the centralized partnership audit regime regulations. The Centralized Partnership Regime was effective for all partnerships starting in 2018. The goal of this new law is to increase the efficiency and ease of partnership audits (for the IRS).
Key points under the Centralized Partnership Audit Regime:
- Partnership Representative instead of Tax Matters Partner (which must be updated in your operating agreement)
- Partners have no participation right to challenge partnership adjustment
- Adjustments occur at the partnership level (instead of the partner level)
- Partnerships can no longer voluntarily amend their returns but must instead file an administrative adjustment request. If you want to read more about this, we highly recommend this article from Tax Advisor.
- The tax rate applied to positive audit or administrative adjustment requests is the highest individual (or corporate, if higher) income tax rate in effect for the reviewed tax year.
An eligible partnership may elect out on an annual basis. A valid election is made on Schedule B of Form 1065.
Electing Out of the Centralized Partnership Audit Regime Pros & Cons:
**This is a very surface level comparison and we recommend you discuss this on an entity and partner specific level with your attorney.
Pros to Electing Out
- Your individual rates will be utilized in audit assessments (i.e. if you do not elect out, the highest applicable income tax rate will apply to adjustments which will most likely be higher than the rate that would have applied if the adjustment passed through to your individual return)
- Current partners will not be held liable for previous partner liabilities
- Each partner has control over the audit
Cons to Electing Out
- The partner is the target of the audit and tax assessment. This means partners’ personal returns are included in the audit.
- Each partner receives separate IRS notices and must negotiate separate settlements with the IRS which can be in some cases an administrative burden.
- Each partner may face different tax outcomes because of separate notices of deficiency, settlements, or court decisions.