The Centralized Partnership Audit Regime – An Overview

Entities treated as partnerships for U.S. federal tax purposes generally are considered "flow through" entities, in that the entity itself does not pay tax.  Rather, the ultimate owners of the entity are required to report and pay tax on their distributive share of all items that flow through from the partnership. Under current law, most such entities are subject to a set of rules enacted in 1982 that govern how any tax audits and litigation matters will be handled. Generally speaking, the IRS audits partnerships at the entity level, working through a "tax matters partner," but any resulting tax adjustments are then collected by the IRS from the ultimate partners. Most partnership agreements have detailed provisions addressing the rights and responsibilities of the partners under these rules.

In November 2015, Congress enacted legislation that repeals the existing partnership audit and litigation rules, and replaced those rules with a new centralized  partnership audit regime. These changes are effective for tax returns filed for partnership tax years beginning after December 31, 2017. However, the legislation authorizes the Treasury Department to provide regulations permitting partnerships to elect into the new regime for earlier periods.  

In this course, attorneys Armando Gomez and Pamela Endreny of Skadden address the changes under the new centralized partnership audit regime. For example, the IRS will audit partnerships at the entity level, and will be able to collect any resulting tax directly from the partnership in the year when the audit or litigation is finally concluded. Thus, the partners at the time that the IRS collects will be the ones who bear the economic burden of the tax adjustments, even if they were not partners in the partnership for the earlier periods that were audited by the IRS. The new regime does provide several potential options for partnerships to mitigate this approach, including an election for certain partnerships to elect out of the new regime or to "push out" any tax adjustments to the partners from the earlier period that was audited.

Learning Objectives:

1. Identify the key definitions and basic parameters of the new centralized partnership regime
2. Understand the potential elections that partnerships and partners might want to consider under the new regime
3. Recognize some of the key areas that the Treasury Department and the IRS will need to address through regulations or other guidance
4. Gain insight on essential points to consider including in partnership agreements and other documents for new and existing partnerships