IRS Releases Proposed Regulations on Centralized Partnership Audit Regime

On November 20th, the IRS released proposed regulations (REG-123652-18) regarding the centralized partnership audit regime created by the Bipartisan Budget Act of 2015.  First, these proposed regulations provide that partnerships, that have a partner that is a qualified subchapter S subsidiary (“QSub??), are not eligible to elect out of the centralized partnership audit regime.  In general, a partnership may elect out of the centralized partnership audit regime if it has 100 or fewer partners and each of those partners is an “eligible partner.??  The proposed regulations provide that a QSub is not an “eligible partner?? for this purpose.  In the preamble to the proposed regulations, the drafters indicated that this designation was driven by a concern that treating a QSub as an eligible partner would allow partnerships that effectively have more than 100 partners to elect out of the centralized partnership audit regime in contravention of the statute’s requirements.

The proposed regulations also provide detail on the treatment of “special enforcement matters?? at Prop. Reg. § 301.7641-7.  Under the proposed regulations, the IRS may determine that the centralized partnership audit regime does not apply to the determination or adjustment of a partnership-related item in circumstances where the application of the regime would fail to advance the regime’s overriding goal of efficiently enforcing the tax law with respect to partnership items.  The “special enforcement matters?? include: (1) situations where a partnership’s treatment of a partnership item is based on information provided by the partner subject to examination; (2) termination or jeopardy assessments against a partner; (3) criminal investigations of a partner; (4) determinations of a deficiency against a partner that are based on an indirect method of proof of income; (5) situations when a controlled partnership’s period of limitations has run but the controlling partner’s has not (with §§ 267(b) and 707(b) defining “control??); and (6) situations where penalties and taxes are imposed on the partnership under chapter 1 of the Cod.  The proposed regulations require the IRS to notify the taxpayer to whom adjustments are made if the adjustments are made outside the centralized partnership audit regime.

The proposed regulations also amend existing regulations to account for changes to the Code made by the Tax Technical Corrections Act of 2018 and to provide clarification, including changes to guidance on imputed underpayments and push-out elections.  Generally, these proposed regulations apply to partnership tax years ending after November 20, 2020, or to examinations or investigations beginning after November 24, 2020.  Prop. Reg. § 301.6241-7(b) applies to partnership tax years beginning after December 20, 2018, or to examinations beginning after November 24, 2020.  The IRS may permit a taxpayer to apply these regulations retroactively to any partnership tax year subject to the centralized partnership audit regime.  Comments are due on or before January 25, 2021.

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