Should You Elect Out of the New Partnership Audit Rules?1 min read
The Bipartisan Budget Act signed into law in 2015 and effective for partnership returns filed for taxable years beginning after 2017 has significant impacts on partnership audits. Most notably that audit adjustments are to be recognized in the year an audit is concluded rather than in the year being audited.
Because of this, a partnership should consider electing out of the new partnership audit rules.
The law sets up a centralized system for audit, adjustment, assessment and collection of tax that applies to all partnerships — except those eligible partnerships that have filed a valid election out.
Electing out of the centralized system will leave past-law partnership audit rules in place.
Unlike past-law partnership audit rules, an underpayment of tax determined as a result of an examination of a taxable year will be imputed to the year during which the adjustment is finally determined, and will be assessed against and collected from the partnership with respect to that year rather than the year under audit.
• a partnership in 2020 is under audit for the taxable year 2018 resulting in a determination of underpayment
• the partnership then litigates in tax court,
• the decision does not become final until 2021,
• that means the adjustment year is 2021,
• underpayment will then be collected from whoever is in the partnership in 2021, even though some 2018 partners may have left the partnership.
To be eligible to elect out, the partnership must have fewer than 100 partners and none of those partners can be in another partnership. A partnership will be allowed to elect out of the centralized system and have it and its partners governed by the past-law partnership audit rules.
The annual election will be made with a timely-filed return of the partnership taxable year to which the election relates. The election must include the name and taxpayer identification number of each partner of the partnership.
If this is something your partnership needs to consider, call Simons Bitzer at 317-782-3070 to discuss.
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