The new Centralized Partnership Audit Procedures (CPAP) applies to all partnerships (LLC’s) for tax years beginning after 2017.
These CPAP are designed to make it easier for the IRS to audit partnerships and collect any underpayments of tax. The IRS will continue to audit partnerships at the partnership level. However, under the new post-2017 CPAP, audit adjustments made to partnership-related items will be made at the partnership level and any additional tax, penalty and interest associated with such adjustments will be paid by the partnership in the year the audit is finalized, unless a “push-out election” is made. Generally, if the tax is paid at the partnership level, the tax will be computed by applying the highest individual or corporate tax rate to the adjustments, and potentially current partners could be responsible for tax liabilities of prior partners. If instead a “push-out election” is made, the partnership must provide statements to each of its partners notifying each partner of their portion of the imputed underpayment, and the partners would have to pay their portions of the imputed tax, interest and penalties. Partnerships may be able to elect out of CPAP if they meet certain eligibility criteria.
Action needed prior to filing your 2018 partnership return:
1. Review the number of partners and entity status of all of the partners in the partnership and determine whether your partnership is eligible to opt out of the CPAP.
2. If your partnership is eligible to opt out of CPAP, determine whether the election should be made for 2018.
3. If your partnership is not eligible to opt-out of CPAP, determine who should be named as the Partnership Representative in the 2018 return.
4. Given the broad authority given to partnership representatives, we recommend that all partnerships and LLC’s designate their partnership representatives either when they are initially formed or via an amendment to their existing Operating Agreement.
Election Out for Small Partnerships
Partnerships may elect out of the CPAP for any tax year only if they are deemed to have 100 or fewer partners and all of the partners are considered to be eligible partners. A partnership is deemed to have 100 or fewer partners if it is required to furnish 100 or fewer Schedules K-1 to partners or nominees for the year, treating each statement that must be furnished to an S corporation shareholder as a separate statement. In order to elect out of the CPAP, all of the Schedules K-1 must be issued to eligible partners, which include individuals, C corporations, foreign entities that would be treated as a C corporation if they were a domestic entity, S corporations, or estates of a deceased partner. If any Schedules K-1 are furnished to ineligible partners such as partnerships, trusts, foreign entities not described above, disregarded entities (ex. single member LLC’s), estates of individuals other than a deceased partner and any person that holds an interest on behalf of another person, the partnership is not eligible to make this opt-out election. A partnership must make the opt-out election on its timely filed return for the tax year to which the election applies and must notify its partners of the election within 30 days of the day it makes the election.
Under the CPAP, partnerships must designate a Partnership Representative for each year, instead of a Tax Matters Partner, who will have broad authority to act on behalf of the partnership and bind the partnership and partners. If no partnership representative is appointed, the IRS will designate one.
Please call Mary Horbachewski or Gina McDonough at your earliest convenience to discuss how the new CPAP will impact your partnership and to review planning opportunities.