IRS finalizes rules for centralized partnership audit regime

The Internal Revenue Service has issued final regulations implementing the centralized partnership regime, allowing the IRS to audit large partnerships, such as hedge funds and private equity firms, more easily.

The Bipartisan Budget Act of 2015 replaced the partnership audit rules under a 1982 law, the Tax Equity and Fiscal Responsibility Act, also known as TEFRA, with a centralized partnership audit regime that generally allows the IRS to determine, assess and collect taxes at the partnership level instead of forcing the IRS to audit each individual partner in a big business that could have hundreds of partners. The centralized audit regime was subsequently amended by the PATH Act of 2015 and the Consolidated Appropriations Act of 2018. In June 2017, the Treasury and the IRS issued a set of proposed regulations pertaining to the scope of the regime and the ability to elect out of it, along with partnership adjustments made by the IRS and determination of the partnership’s liability, and an alternative to payment of an imputed underpayment. The IRS and the Treasury received written comments and held a public hearing later that year.

In November, they also issued proposed regulations regarding the international provisions under the centralized partnership audit regime, including the withholding of tax on foreign persons, the withholding of tax to enforce reporting on certain foreign accounts, and the treatment of creditable foreign tax expenditures of a partnership. However, they didn’t receive any written comments on those regulations or hold a public hearing.

Last Friday, hours before the partial government shutdown, the IRS issued the final regulations for the centralized partnership audit regime. They affect partnerships for taxable years beginning after Dec. 31, 2017 and ending after Aug. 12, 2018, as well as partnerships that make the election to apply the centralized partnership audit regime to partnership taxable years beginning on or after Nov. 2, 2015, and before Jan. 1, 2018.

The day before that, last Thursday, it also issued Notice 2019-06 , informing taxpayers that the Treasury Department and the IRS intend to issued proposed regulations addressing some enforcement matters relating to the new audit regime. Proposed rules will be issued to allow the IRS to determine that the centralized partnership audit regime will not apply to adjustments to partnership-related items in certain limited circumstances and that partnerships with a qualified subchapter S subsidiary (or QSub) are not eligible to elect out of the centralized partnership audit regime except by applying a rule similar to the rules for S corporations under section 6221(b)(2)(A) to the QSub partner.