Final rules govern election out of centralized partnership audits

By Sally P. Schreiber, J.D.

The IRS issued final regulations (T.D. 9829) that implement the rules for electing out of the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113. The regulations apply to partnership tax years beginning after Dec. 31, 2017, which is also the effective date of the new audit rules. All of the rules were issued in proposed form in June 2017. The IRS finalized the election-out rules separately from the other rules (see “Centralized Partnership Audit Rules Are Reissued in Proposed Form,” for more on the proposed regulations).

The comments the IRS received on the proposed regulations for electing out covered the following three areas: determining the number of partners in order to determine whether the partnership has 100 or fewer partners under Sec. 6221(b) and is therefore eligible to elect out; determining which partners are eligible partners for purposes of making the election out; and the mechanics of making the election out.

Under the final regulations, partnerships that are required to furnish 100 or fewer Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., and all of the partners are “eligible partners” can elect out of the new audit regime. Special rules determine the number of partners when a partner is an S corporation. Under the final rules, the number of shareholders of the S corporation partner are taken into account in determining the 100-or-fewer threshold. Another provision counts partners who are married as two separate partners because Sec. 6221(b) does not require them to be treated as one partner. The IRS received a number of comments regarding the determination of the number of statements to be furnished, but only made clarifying changes to an example in the final regulations based on the comments.

The regulations define the term “eligible partner” as any person who is an individual, C corporation, eligible foreign entity, S corporation, or an estate of a deceased partner. The IRS received many comments suggesting that partnerships, disregarded entities, trusts (including tax-exempt trusts, revocable trusts, charitable remainder trusts, grantor trusts, and nongrantor trusts), individual retirement accounts, nominees, qualified pension plans, profit sharing plans, and stock bonus plans should be considered eligible partners. The preamble to the regulations explains that the IRS rejected the numerous suggestions that the Service exercise its regulatory authority to expand the types of entities that could qualify as eligible partners because it would unduly burden the IRS by increasing the number of partnerships subject to the deficiency procedures that the IRS must follow when a partnership elects out of the centralized audit regime.

The final rules explain the procedures for making an election out of the regime, including the disclosure of partner information required in the election, and the requirements for partner notification of the election. The final regulations also require the IRS’s consent to revoke an election, despite suggestions from commenters that requiring IRS consent will make it less likely that partnerships will try to undo the election out, which would increase the number of partnerships subject to the centralized regime. The IRS was concerned that not requiring consent could increase the likelihood that partnerships would revoke their elections when the limitation period was about to expire, and the IRS would face compliance burdens as a result.

Sally P. Schreiber ( is a JofA senior editor.

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