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New for 2018 – Partnership returns, unless you are eligible to elect out and do so, will automatically be subject to the IRS “streamlined method” of auditing and collecting taxes relating to partnership returns.

Under the “centralized method,” when audited, the IRS will correspond directly with a Designated Partnership Representative (DPR), designated on each year’s Form 1065. This representative will have sole authority to represent and bind the full partnership regarding any IRS administrative or judicial tax proceedings.

Also under the CPAR, if an increase in tax is assessed because of the audit, the partnership will be required to pay the tax at the highest individual tax rate instead of assessing tax to each individual partner.

Advantages of CPAR ("Opting In")

  • Streamlines the audit process allowing for potentially faster resolution.

  • Partnership pays the tax on any resulting changes (affecting taxable income), rather than the individual partners.

  • Limits the scope of the audit to only the partnership, rather than the partnership PLUS the individual partners.

Disadvantages of CPAR ("Opting Out")

  • Tax will be charged at the highest individual tax rate (currently 37%) rather than each partners' individual rates, which may be lower.

  • The Designated Partnership Representative (DPR) will have broad powers to make decisions relating to the IRS which could conflict with other partners.

  • Due to the broad decision-making powers, the DPR could expose themselves to potential legal action from other partners.

  • Audits generally occur 2-3 years after a tax return is filed, and may span several tax years.  Partners at the time the return is filed may not be partners at the time of the audit, thus making it difficult to get capital contributions from the old partners to cover the tax payable by the partnership to the IRS.

  • It is highly recommended that your partnership agreement be reviewed and amended by a lawyer to define and limit the DPR's responsibilities.

Who Can Opt Out of CPAR?

  • Partnerships with fewer than 100 partners and which do not have ineligible partners, listed below, may elect out.

  • Ineligible partners:

    • Partnerships​

    • Trusts

    • Certain foreign entities

    • Single-member LLCs and other "disregarded entities"

  • The Opt-Out Election must be made on a timely-filed Form 1065 (partnership tax return), including extensions.​

  • Note: if you elect out of CPAR, you must notify each partner in the partnership within 30 days of the 1065 filing.

Who Should Elect Out?

  • In general, opting out would likely result in lower net taxes due for most taxpayers/partners.

  • However, partners with complicated tax returns, including multiple K-1s, businesses and rentals, etc., may not want the extra scrutiny on their personal tax return(s).

  • Please contact our office if you need help making this decision.

Who Should be the Designated Partnership Representative (DPR)?

  • We suggest that all partners vote or agree on who should be the DPR.  This may be a "managing partner," "tax matters partner," or partner with the most experience in the tax/financial realm.

  • The DPR may change every year, it does not need to always be the same person.  However, once the DPR is selected and the annual Form 1065 (partnership tax return) is filed, that year's representative cannot change unless the IRS determines an improper designation was made.

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