IRS Issues Final Regulations on Centralized Partnership Audit Regime
The IRS recently issued final regulations T.D. 9969 providing an exception from the centralized partnership audit regime for partnership-related items involved with special enforcement matters. They additionally provide alternative rules for examinations of excepted items as well as discuss imputed underpayments resulting from centralized audit regime adjustments. The final regulations, which went into effect on Dec. 9, generally conform to the November 2020 proposed regulations.
Exceptions for Special Enforcement Matters
One special enforcement matter involves specific situations where an adjustment during an examination of a person other than the partnership necessitates an adjustment to a partnership-related item. The final regulations state the IRS may decide the centralized partnership audit regime does not apply to adjustments to partnership-related items when the following conditions are met:
- A person other than the partnership must be under examination
- The IRS must propose an adjustment to an item that is not related to the partnership
- A partnership-related item must be a component of the unrelated item
- Determinations about the partnership-related item must be necessary to adjust the unrelated item
- The treatment on the partnership's return of the partnership-related item that is the component of the non-partnership-related item must be based, in whole or in part, on information from the person under examination
The IRS stated it changed Regs. Sec. 301.6241-7(b)(1)(iii) to clarify the partner’s information that forms the basis of the reporting by the partnership must come from the partner's books and records, not those of the partnership.
The second special enforcement matter involves situations where a qualified Subchapter S subsidiary (QSub) is a partner. Regs. Sec. 301.6221(b)-1 provides rules for electing out of the centralized partnership audit regime for partnerships with fewer than 100 partners, including determining whether a partnership is eligible to elect out. A partnership can elect out if it has 100 or fewer partners for the tax year, each partner is eligible, the election is made timely and the partners are notified. The final regulations state that a partnership with a QSub as a partner cannot elect out of the centralized partnership audit regime. In the preamble, the IRS said this ensures there will not be more than 100 partners to audit, which could happen if QSubs are allowed to elect out.
Imputed Underpayments
When a partnership's taxes, penalties or other amounts are adjusted under the centralized partnership audit regime, there must be a means to include the amounts in the imputed underpayment and to account for them if the partnership pushes out the adjustments to the partners. Also, there must be a way to account for adjustments to a previously determined imputed underpayment. The final regulations provide rules regarding the calculation of the imputed underpayment during an examination as well as adjustments to the imputed underpayment as calculated by the partnership.