Financial Statements: Take the Time to Read the Entire Story

Why an Eligible Partnership Should Elect Out of the Centralized Partnership Audit Regime

CPAs & Advisors

Andrew Kramer
Andrew Kramer CPA Senior Manager CPAs & Advisors

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For taxable years beginning after December 31, 2017, the Bipartisan Budget Act of 2015 (BBA) created a new centralized partnership audit regime (CPAR) and repealed the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership audit procedures enacted in 1982. Unless the partnership makes a valid “opt out” election, the CPAR procedures will apply. If the partnership makes a valid “opt out” election, procedures historically known as Non-TEFRA procedures will apply to any audits of partnership entity returns or investors. Partnerships subject to the CPAR are often referred to as BBA partnerships.

A partnership may elect out if:

  1. the partnership issues 100 or fewer K-1 statements to partners for the tax year, and
  2. each K-1 statement the partnership is required to furnish is furnished to a partner that is an individual, a C corporation, a foreign entity that would be treated as a C corporation if it were a domestic entity, an S corporation, or an estate of a deceased partner.

Note that when an eligible partner is an S Corporation, the number of statements issued to S Corporation shareholders counts towards the total 100 statements. The regulations provide an example of a partnership with 50 individual members and one S Corporation member with 50 shareholders. Since the partnership would be required to issue 51 statements and the S Corporation 50, the total of 101 statements would cause the partnership to be ineligible to elect out.

The partnership must elect out of CPAR each year. Failing to do so in a particular year will subject that year to the CPAR procedures.

Why One Should Consider Electing Out

CPAR provides the IRS with the broad ability to assess tax at the partnership level for any perceived deficiency in tax paid by a partner on a partnership item (called an imputed underpayment or IU). Partnerships may request to modify the IU and may elect to push out the adjustments underlying the IU instead of paying. If the partnership instead elects to pay the tax, the tax will be assessed at the highest rate in effect for the reviewed year under section 1 or 11 of the Internal Revenue Code.

Partnerships should also consider electing out if ownership changes have occurred or are anticipated. Failing to elect out could lead to a current partner bearing the tax liability on an item properly allocable to a former partner.

BBA partnerships are generally prohibited from filing amended returns, absent specific administrative grace from the IRS for certain changes in legislation. Should a BBA partnership need to make a change to a prior year filing, it must file an Administrative Adjustment Request (AAR). In certain circumstances, an AAR can yield a disastrous inability to utilize otherwise available tax deductions.

Finally, first-time penalty abatement is not available to a partnership that is subject to the CPAR. Many partnerships are eligible to use the first-time penalty abatement to erase a penalty owed to the IRS, which can often be significant.


In summary, partnerships should carefully consider electing out of the CPAR whenever possible. Let us help determine if electing out is right for your business.

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