What is the Centralized Partnership Audit Regime (CPAR)?
New for 2018 – Partnership returns, unless you are eligible to elect out and do so, will automatically be subject to the IRS “streamlined method” of auditing and collecting taxes relating to partnership returns.
Under the “centralized method,” when audited, the IRS will correspond directly with a Designated Partnership Representative (designated on each year’s Form 1065). This representative will have sole authority to represent and bind the full partnership regarding any IRS administrative or judicial tax proceedings.
Also under the CPAR, if an increase in tax is assessed because of the audit, the partnership will be required to pay the tax at the highest individual tax rate instead of assessing tax to each individual partner.
Advantages of the Centralized Audit Regime
- Streamlines the audit process allowing for possible quicker resolution
- Partnership would pay the additional tax rather than each individual partner
Disadvantages of the Centralized Audit Regime
- Tax will be charged at the highest individual rate (currently 37%) rather than each partner’s individual rates which may be lower (there still is a method to tax the partners individually but the Designated Representative would have to make that election)
- The Designated Partnership Representative will have broad powers to make decisions relating to the IRS which could conflict with other partners
- The Designated Partnership Representative due to the broad powers could expose him/herself to potential legal action from other partners
- Audits generally will not occur until 2-3 years after the return is filed. Partners at the time the return is filed may not be partners at the time of audit, thus making it difficult or impossible to get capital contributions from the old partners to cover the tax payable by the partnership.
- It is highly recommended that your partnership agreement be reviewed and amended by a lawyer to define/limit the designated representatives responsibilities
Who Can Opt Out of the Centralized Audit Regime?
- In general, partnerships that have less than 100 partners and do not have an ineligible partner (listed below) can elect out.
- Ineligible Partners
- Partnerships, Trusts, Certain Foreign Entities, Single Member LLCs and Other “Disregarded Entities”
- Ineligible Partners
- The Opt out Election must be made on a timely filed Form 1065 including extensions
- Note: If you elect out of the “regime”, you must notify each partner in the partnership within 30 days of the 1065 filing
Who Should Elect Out?
- In general, it appears if eligible “Opting Out” may be the best option. However, all the advantages and disadvantages listed above and otherwise not identified here should be considered prior to deciding.
- Please contact our office if you need help making this decision
If You Do Not Elect Out, Who Should Be the Designated Representative?
- In general, we suggest a partner in the partnership should be designated but it is not required
- As a matter of policy, neither PLC Rouse Norton nor any of its employees will agree to be a Designated Representative
- The person designated can change each year, however once selected and filed with Form 1065 that years representative cannot change unless the IRS determines an improper designation was made
by Tom Norton, Partner, PLC Rouse Norton, PLLC © 2019