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DON'T FORGET ABOUT THE NEW PARTNERSHIP IRS AUDIT RULES AND THE ELECTION OUT OF THEM (UNDER IRC 6221(B))

January 16, 2019

DON'T FORGET ABOUT THE NEW PARTNERSHIP IRS AUDIT RULES AND THE ELECTION OUT OF THEM (UNDER IRC 6221(B))

The centralized partnership audit regime rules are now in effect and change the way partnerships are audited by the IRS. These new rules require the actual partnership to pay any deficiencies resulting from any audit adjustments. This means that the IRS will apply the top tax rates to any audit adjustments to calculate deficiencies, without regard to any partner level attribute that may have otherwise reduced the tax due from an audit adjustment. 

However, certain partnerships can elect out of these rules and force the deficiencies to be calculated at the partner level, which can take advantage of a partner's lower tax rates, and any tax attributes that may help to offset the potential audit adjustments. This election must be made each year on a timely filed tax return for the partnership and is only available for partnerships that meet the following criteria: 

  • Must have less than 100 partners
  • Can only have the following eligible partners in the partnership; 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
    • Ineligible partners include the following: partnerships, trusts, disregarded entities, nominees or other similar persons that hold an interest on behalf of another person, foreign entities that are not eligible, and estates that are not estates of a deceased partner.

This election can only be made by the partnership representative and must disclose each name and EIN of the partners. The partnership must notify each partner of the election in any year made. For further information about the advantages or disadvantages on the election, contact us in one of our many locations.

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