The Centralized Partnership Audit Regime (CPAR) is a tax administration system introduced by the Bipartisan Budget Act of 2015 (BBA) that changes how the IRS audits partnerships and collects taxes related to underreported income or adjustments. Prior to the regime, partnership audits could be complex and cumbersome, as tax adjustments were typically passed through and examined at the partner level, resulting in time-consuming and inconsistent procedures.
Under the Centralized Partnership Audit Regime, the IRS conducts a single audit at the partnership level rather than auditing each partner separately. This streamlined process allows the IRS to assess and collect additional taxes, penalties, and interest directly from the partnership entity, known as the “partnership representative.” The partnership then adjusts the tax liabilities internally among the partners according to their interests.
Key features of the Centralized Partnership Audit Regime include:
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Partnership Representative: The partnership must designate a partnership representative with authority to act on its behalf during an IRS audit and related proceedings. This representative replaces the former “tax matters partner” role and has broader authority to make decisions.
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Audit Adjustments: Any changes to taxable income determined in the audit apply at the partnership level, simplifying corrections and reducing administrative burden.
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Imputed Underpayment: The partnership is generally responsible for paying any additional tax identified during the audit for the reviewed year, even if the tax adjustments would have been allocated to partners who no longer hold interests.
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Push-Out Election: Partnerships can opt to push out the audit adjustments to their partners, allowing tax liabilities to be reported and paid on the individual partners’ returns instead. This election must be made within a specified timeframe following audit completion.
This regime enhances IRS efficiency by reducing the complexity of auditing multi-partner entities and provides clearer rules for partnerships to manage audits. It applies to partnerships filing returns for tax years beginning after December 31, 2017.
For partnership entities, understanding CPAR is essential for compliance and strategic tax planning. Incorrect handling of audits under this system can lead to unexpected tax liabilities or penalties.
For more detailed information, refer to IRS guidance on partnership audits under the Bipartisan Budget Act on IRS.gov and IRS Publication 544 concerning partnership tax rules.