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Centralized partneship audit regime

Technical topics regarding tax preparation.
#1
IsabelM  
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considering that a partnership is eligible to elect out of centralized partnership audit regime, any reason why NOT doing it?
 

#2
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IMO, no.
~Captcook
 

#3
Pitch78  
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CaptCook states the consensus of most. Keep in mind that electing out puts the audits at the partner level, and allows the IRS to possibly audit more than just the partnership items. Also, by not electing out there is only one audit, which may be less costly (both time and money) for all involved. If there is no election to opt out, you need to make sure the partnership agreement covers the push out and other issues.
 

#4
Wiles  
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Also, by not electing out there is only one audit, which may be less costly (both time and money) for all involved. If there is no election to opt out, you need to make sure the partnership agreement covers the push out and other issues.

Pitch78, thank you for explaining the disadvantages for NOT electing out.

It seems to me that NOT electing out keeps more options available to partnership:
1. It keeps the audit solely at the entity level.
2. It provides the partners the ability to choose to pay the entity tax. This may be more efficient and less costly.
3. They can still achieve the benefits of "electing out" by either amending the partner tax returns, pulling in or pushing out.

I am open for rebuttals. Please let me know what I have missed.
 

#5
JAD  
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4. Not electing out preserves the option of each partner to hold the partnership interest in his/her revocable living trust.
 

#6
Wiles  
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Well. Yes. Not sure that goes on the list, though. Because that would prevent the ability to elect out.

Which is true for almost all of my partnerships
 

#7
JAD  
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If partnership does not elect out, then partners have more flexibility as to how they take ownership. Isn't that a benefit of not electing out?
 

#8
Wiles  
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OK - Good point. We will make that #4 on the list :)

Anybody have anything to say about choosing instead to NOT elect out?
 

#9
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Wiles wrote:Anybody have anything to say about choosing instead to NOT elect out?


The audit risk of partnerships not electing out will go WAY up as compared with those that ARE electing out. Maybe that's not a big deal, but it is enough to compel me to advise my clients to do so whenever possible.

I'm vaguely aware that in CA there are some compelling estate tax and other reasons for holding certain assets in a trust. Maybe those outweigh the income tax risk/benefits. Here in WA state, it will be very few clients of mine who have such a situation.
~Captcook
 

#10
JAD  
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If the partnership interests are NOT held in a revocable living trust, and if total assets are over a certain amount, don't you have to go through probate?
 

#11
Wiles  
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The audit risk of partnerships not electing out will go WAY up as compared with those that ARE electing out.

Can you please elaborate on this? I don't understand how not electing out is a "red flag" to the IRS?
 

#12
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JAD wrote:If the partnership interests are NOT held in a revocable living trust, and if total assets are over a certain amount, don't you have to go through probate?


I'm not certain, but in WA probate is not a big deal.
~Captcook
 

#13
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Wiles wrote:The audit risk of partnerships not electing out will go WAY up as compared with those that ARE electing out.

Can you please elaborate on this? I don't understand how not electing out is a "red flag" to the IRS?


I never said it was a "red flag". However, the whole point of this regime is to make it easier for the IRS to audit partnerships. Logic says, if you elect out, your audit chances are less than if you do...everything else being equal.

We'll have to see if that presumption bears out in actual numbers, but I'd put money on it, if given the chance.
~Captcook
 

#14
JAD  
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I'm not sure I understand push out and pull in. Is this accurate:

push out: reviewed year partners file reviewed year amended returns to report the adjustments

pull in: reviewed year partners file something to report the adjustments, but its not an amended return, and the partnership still has to pay up on items that remain related to partners who didn't file something to report the adjustments.
 

#15
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https://bracewell.com/insights/new-part ... -procedure

That's a fair summary. If not electing out, it seems OA language binding all partners to agree to the Pull-in method would be a good idea.
~Captcook
 

#16
MWPXYZ  
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not too sure the disadvantages are really disadvantages. Having an audit at solely the entity level will be an advantage for partners that have otherwise risky tax positions on their personal returns IF they are in the highest tax bracket. If they are not in the highest bracket they will be either filing amended returns exposing risky tax positions or (I am assuming will be) providing the IRS sufficient information to report the tax in a push out calculation which will then expose any risky tax positions.

If, again, ALL the taxpayers are in the highest bracket then paying an entity tax would be efficient, assuming that the partnership has the cash to make the payment.

In some states a revocable living trust, used for avoiding probate, could be revoked in favor of a Transfer on Death agreement/account and thus allow the partner to be an eligible entity to avoid the new "regime".

The push in method has the risk that a partner will not or cannot (due to lack of available funds) make the payment on an amended return. Thus what partner would file an amended return unless all the other partners are on board??? And you may not find out that everyone is not on board within 45 days, thus missing the push out option.

The Push out election has the extra interest "feature' and also has the same issue that is the root of avoiding the new regime: who will take responsibility for being "that person". The proposal of amendments to the partnership agreement in determining the restrictions the partners place on the rep and the protections given to the rep seem to either raise contentions, even in just the planning stage (with greater contention during an audit) or, as I have seen mostly, a denial of facing the issue altogether leaving the choice of a rep a March 15th choice; maybe a September 15th choice!

BTW, the rep's decisions cannot be overturned by either state law or partnership agreement (301.6223-2(c )(1)) so pick a stable person who everyone trusts.
 


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