Consolidated Partnership Audit Regime and Reasonable Cause Penalty Abatement

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  • #33854
    Vicki Thompson
    Participant

    Can you please tell me how the opting out of the Consolidated Partnership Audit Regime (CPAR) affects ability for partnership to claim reasonable cause for penalties abatement?  
    The Tax Book Deluxe Edition states on page 20-7 that the new audit regime applies to all partnerships dauntless the partnership in an eligible partnership and it elects out by making a valid election using Schedule B-2 (1065).
    On page 20-4 under Penalties, it states, “The penalties listed above (late filing and Schedule K-1) may be waived for reasonable cause.”  then it list 4 criteria for Domestic partnerships with 10 or fewer partners:  One criteria is “The partnership has not elected to be subject to the rules for consolidated audit proceedings” which sounds like opting out to me, since the CPAR is automatically applied for 2018 partnership returns.
    Further research seems to support this, but then I tried reading the IRS proposed regulations and got very confused.  
    I’m filing this partnership return and hoping that I’ve interpreted this correctly.  It would be wonderful if I could get an answer as soon as possible. 
    Thank you, Vicki Thompson

    #33875
    Eric Green
    Keymaster

    Vicki,

    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.

    #33997
    Vicki Thompson
    Participant

    Eric, you bring up a good point about the consequence of opting out and then individual partners can be opened up for audit. In my situation, my clients are husband and wife filing as partners. How does opting out affect eligibility for requesting penalty abatement due to reasonable cause? The previous rules required opting out to be eligible for reasonable cause abatement. Is that true for the new rules, as well? More details are listed in the originally posted question.

    I see I caused some confusion by misquoting a section, so let me correct it:
    The Tax Book Deluxe Edition states on page 20-7 that the new audit regime applies to all partnerships UNLESS, the partnership IS an eligible partnership and it elects out by making a valid election using Schedule B-2 (1065).

    #34038
    Eric Green
    Keymaster

    Vicki I honestly do not know. My knee jerk reaction is to says no, that the reasonable cause would be fought at the partnership level instead but can still be raised. I have not seen anything that states a partnership is not allowed a reasonable cause argument exception for the penalties.

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