In our previous newsletter, we went over the various methods in which taxpayers can either opt out of CPAR (the Centralized Partnership Audit Regime) or lessen its impact, and the pros and cons of each method. In this final memo of our multi-part series, we list out a set of specific action items to take, in light of these new changes.
Recap: The New Regime
In an effort to increase the efficiency of Partnership examinations, the Bipartisan Budget Act of 2015 repealed the previous rules regarding the auditing of partnerships: the TEFRA partnership audit rules and the electing large partnership audit rules. Under the new rules under IRC §6221(a), at the end of an exam, rather than having the Auditor’s assess the increase of tax at the Partner level, the new rules will levy the tax at the Partnership level. While these changes are beneficial to the IRS, taxpayers will be at a disadvantage. As mentioned previously, taxpayers have several methods to elect out of CPAR, or minimize its effects. However, regardless of whether or not a taxpayer is subject to the new rules, the following action items should be undertaken:
Step #1 Determine if the Partnership can Opt Out
As mentioned in the previous newsletter, if certain qualifications are met, a Partnership can make the election to opt out of CPAR all together. Partnerships should take the necessary steps to determine if they are eligible for this election. If not, Partnerships should determine which method should be taken to minimize CPAR’s impact.
Step #2 Designate a Partnership Representative
With the replacement of the Tax Matters Partner (TMP), to the new Partnership Representative (PR), Partnership’s unable to elect out should deliberate on who to appoint as the Partnership Representative. In many cases, the person or entity who previously served as the Tax Matters Partner will be appointed as the Partnership Representative. However, there will be situations in which appointing an outside advisor to serve in the role may be prudent. Please keep in mind that the powers of the Partnership Representative is far more expansive than the Tax Matters Partner, and has the ability to bind the partnership into any agreement with the IRS.
Step #3 Amend the Partnership Agreement
In light of the new regime, any Partnership who may be subject to CPAR should amend their partnership agreement, to incorporate the role of the new Partnership Representative. Clear solid rules regarding the appointment and removal of a Partnership Representative is a must have. In addition, the Partnership Agreement should be modified to take into account situations in which the partnership incurs a tax liability, in light of a prior period adjustment made by the IRS. This is especially important if there are new and old Partners entering and exiting on an annual basis.
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Article contributed by: Joshua Bodenstadt, Derek Hess, and Andy Nguyen