Reply To: Consolidated Partnership Audit Regime and Reasonable Cause Penalty Abatement

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Eric Green


To Opt out of the centralized partnership audit regime may do so by answering “yes” on Form 1065, Schedule B, line 25 and completing the new Schedule B-2. Pursuant to IRC Section 6221(b) a partnership is eligible to opt out if:
1. The partnership elects out for such taxable year on a timely filed tax return;
2. For such taxable year, the partnership is required to furnish 100 or fewer statements under Section 6031(b) with respect to its partners (i.e., Schedule K-1s);
3. Each of the partners of such partnership is an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner; and
4. The partnership notifies the partners of such election within 30 days of making the election.

A partnership is not eligible to make an opt out election if any of its partners are trusts, partnerships, non-C corporate foreign entities, disregarded entities, nominees or estates of non-deceased individual.

The benefit of the new partnership audit rules is that the audit is done at the partnership level and the partnership pays. If the partners elect to opt out, then the audit is still done at the partnership level but all the individual partner 1040s will also have to be opened up for audit, automatically expanding the scope of the audit and bringing in other issues. Each partner will be forced to litigate the adjustments against him/her/it separately, maybe in different courts, which could result in inconsistent determinations on identical issues. And certainly, the situation would be ripe for different settlements between any one partner and the IRS. In addition, an audit at the partner level will require the partnership’s cooperation in providing information and documentation. Failure to do so could be very detrimental to a partner.

I generally do NOT recommend opting out. Better to have everything under one audit with one representative in one jurisdiction. I would e thrilled to hear other member’s takes on this, but that is mine as of now, though I need to admit I have yet to get one of these audits since the rule changed.