Partnership Audit Regime

Since 2018, partnerships have had to contend with new rules introduced in the Bipartisan Budget Act of 2015. These rules were intended to simplify the auditing process of partnerships by creating tax liabilities at the partnership level in the case of increased income due to audit adjustments. Partnerships can choose to elect out of the partnership audit regime by making an annual opt-out election.

Not electing out

If the partnership does not elect out, any audit adjustments that result in increased tax will be taxed at the highest effective rate for that year. The partnership will be responsible for paying this tax, rather than any individual partner.

Partnership representative

A partnership representative is someone who has the authority to act on behalf of the partnership regarding the partnership audit regime procedures. The partnership must designate a partnership representative each year unless it elects out of the partnership audit regime.

Electing Out

If the partnership elects out, any audit adjustments that result in increased tax will be assessed at the individual partner level. This means that each partner would pay their portion of the increased tax, at their own individual tax rate (which could be lower than the highest effective tax rate used when not electing out).

Along with potentially lower taxes from the taxes being assessed at the individual level, electing out may provide the following benefits:

·         If there will be changes in partnership ownership, electing out it will make sure that current partners do not pay tax that former partners should be assessed.

·         Partnerships that do not elect out are required to file an Administrative Adjustment Request rather than an amended return if they need to make a change to a prior year return. This can make it difficult to utilize tax deductions in some instances.

To elect out, a partnership cannot have:

·         More than 100 partners

·         Partners that are anything other than individuals, C-corps, S-corporations, or estates