The Centralized Partnership Audit Regime (CPAR) is, essentially, a new take on how the Internal Revenue Service (IRS) conducts audits of partnerships. Lawmakers designed the process to make it easier for the IRS to audit partnerships and collect any resulting tax. This article explains how the regime works and what partnerships should consider when deciding whether to elect into the new system.
Understanding how partnership audits function under CPAR is especially important given the IRS’s broader enforcement priorities. Partnerships with complex filings or multi-year issues may face scrutiny similar to other taxpayers selected for examination, making it helpful to understand what commonly triggers an IRS audit.
How do partnership audits work?
If a partnership undergoes a federal tax audit and the IRS determines additional tax is due from a prior tax year, the IRS generally expects the partnership in the current tax year to pay the bill. This approach can shift liability to partners who were not involved during the year the tax issue arose.
Partnerships that elect into the CPAR designate a partnership representative. This individual has authority to interact with the IRS, review audit findings, and elect to “push out” adjustments to the partners who were responsible during the audited tax year. This can result in those partners being held accountable for additional tax, penalties, and interest.
Because partnership audits can involve multiple tax years and significant sums, disputes over audit findings are not uncommon. In those situations, understanding how IRS audits typically proceed and conclude can help partnerships anticipate next steps and potential outcomes.
Should partnerships elect into the CPAR?
According to a recent Forbes publication, many partnerships choose to opt out of the CPAR. One common concern is the potential for disputes or litigation between partners and the partnership representative if disagreements arise during or after an audit.
Another concern is more practical: any system designed to make audits easier for the IRS may increase enforcement efficiency, potentially limiting a partnership’s leverage during the examination process. If an audit results in an unfavorable adjustment, partnerships may still have options depending on the facts, including audit reconsideration when new information becomes available.
What is best for my partnership?
Whether opting out of the CPAR is the right decision depends on a careful evaluation of the partnership’s structure, risk tolerance, and potential exposure. Factors such as partner turnover, recordkeeping practices, and the likelihood of future audits should all be considered.
The attorneys at Goldburd McCone are familiar with partnership audits and the CPAR framework. They can review your partnership’s specific circumstances and discuss the pros and cons of electing into—or opting out of—the regime to help you make an informed decision that protects your business interests.