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When can a partnership opt out of the new audit rules?

The Internal Revenue Service (IRS) has attempted to simplify the process used to audit partnerships. As discussed in a previous post, the rules that govern partnership audits changed as of January 1, 2018. However, the IRS does not require all partnerships to follow these new rules.

Opting out of the new partnership audit rules: 2 requirements

There are certain situations when a partnership can opt out of the new audit rules. These two factors are generally required to qualify:

  • Size. The IRS requires partnerships have 100 or less "eligible partners" to opt out of the new rules.  Partnerships, trusts, single member LLCs which are not taxed as corporations are not considered eligible partners. 
  • Communication. Every eligible partner must receive a statement for the taxable year. The agency notes eligible partners do not include a trust, foreign entity, estate or individual holding the interest on behalf of another. The partnership must also notify the partners of the decision to opt out within 30 days of the opt out election.

If approved, the opt out only applies to the tax year in question. Those who wish to opt out regularly must do so on an annual basis. If the partnership opts out of the new audit rules, the pre-TEFRA rules will apply.

Partnerships that find themselves the subject of an audit must take various considerations into account when determining the best course of action. As such, partnerships are wise to seek legal counsel to review the situation.

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