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When does the centralized partnership audit regime not apply to partnership-related items?

By Sally P. Schreiber, J.D.

Please note: This item is from our archives and was published in 2021. It is provided for historical reference. The content may be out of date and links may no longer function.

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Partnerships received guidance from the IRS in November on when the new centralized partnership audit regime does not apply to certain partnership-related items. The proposed regulations (REG-123652-18) provide that the centralized audit regime may not apply when an adjustment during the examination of a person other than the partnership requires a change to a partnership-related item. The regulations also say that a partnership with a qualified Subchapter S subsidiary (QSub) partner cannot elect out of the centralized partnership audit regime.

In Notice 2019-06, the IRS announced that it intended to propose rules addressing two “special enforcement matters” under Sec. 6241(11). The proposed regulations include those rules.

The first matter concerns certain situations in which an adjustment during an examination of a person other than the partnership requires a change to a partnership-related item. The proposed regulations provide that the IRS may determine that the centralized partnership audit regime does not apply to adjustments to partnership-related items when the following conditions are met:

  • The examination being conducted is of a person other than the partnership;
  • A partnership-related item must be adjusted, or a determination regarding a partnership-related item must be made, as part of an adjustment to a non—partnership-related item of the person whose return is being examined; and
  • The treatment of the partnership-related item on the return of the partnership under Sec. 6031(b) or in the partnership’s books and records was based in whole or in part on information provided by, or under the control of, the person whose return is being examined.

The second matter concerns situations where a QSub is a partner in a partnership. The regulations provide that a partnership with a QSub as a partner cannot elect out of the centralized partnership audit regime. The IRS explained in the preamble that it was doing this to avoid having over 100 partners to audit, a possible result of permitting QSubs to elect out.

The IRS asked for comments within 60 days after Nov. 24, the date the proposed regulations were published in the Federal Register.