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Centralized Partnership Audit Regime Election Help

Where is the TurboTax help anymore? There is a new "Schedule B-2 (Form 1065) Election Out of the Centralized Partnership Audit Regime"
However, there is ZERO guidance in TurboTax Business.
The product used to guide users with plain English assistance on difficult topics, but it seems that anymore, it just leaves us flailing and searching google to find the guidance. If the software is not going to provide assistance in matters that we who are not tax pros cannot understand, we may as well just fill out the free forms that are available to us.
C'MON Intuit! Some of us need help in understanding new laws.

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Centralized Partnership Audit Regime Election Help

Partnership tax is in general complicated once it deviates from the plain vanilla partnership.

As a result, the IRS has struggled over the decades in attempting to streamline the audit process of a partnership entity.  These entities range from a simple 2-person return to ones which can have hundreds of partners.

Effective for tax years beginning on or after 1/1/2018 the new centralized partnership audit process became effective.  At a high level, a partnership with more than 100 K-1's cannot opt out of the centralized audit process.  The instructions provide guidance on the determination of how to determine who is a partner for this determination.  Further, in order to elect out, each of the partners must be either 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.

Under the centralized audit process, the IRS deals with one specific individual that represents the partnership and only that person.  Should there be an audit adjustment, the partnership is responsible for paying the additional tax and any penalties.  All partners are "bound" with this position.  There are options as to whether the partnership just pays the tax or whether the tax will be allocated to the partners.

If a partnership is eligible to opt out, and in fact does so, then should there be an adjustment at the partnership level, the IRS is required to made any adjustments at the partner level; dealing with each partner separately.

As you can see, this is a somewhat involved area.  This election is made on an annual basis.

Hopefully you now at least have a general understanding and can make your decision.

*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

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11 Replies

Centralized Partnership Audit Regime Election Help

Part of the issue here is this form has only been released very recently.  Difficult for any software company to add guidance and instructions until the final form and instructions have been released.
Not sure what the exact question is?  The form is pretty straight forward.  If you want to elect out of the centralized partnership audit process then just include the names of the partners on the form.
Attached are the instructions to the form:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i1065sb2.pdf">https://www.irs.gov/pub/irs-pdf/i1065sb2.pdf</a>
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

Centralized Partnership Audit Regime Election Help

Hi @Rick19744, Thanks for Replying.
The question (issue really) is, we are given a choice to elect out of something (or not), but no guidance as to what the advantages or consequences are for the choice that we make.
They (TurboTax) could have explained that the form has just been released, and that they will provide guidance soon.
The link to the IRS instructions are also not much help, in guiding a person who has never heard of this option, to make an intelligent decision as to what the advantages/consequences are for either choice.
The instructions you provided would have been at least a step in the right direction for them to include!

Centralized Partnership Audit Regime Election Help

Partnership tax is in general complicated once it deviates from the plain vanilla partnership.

As a result, the IRS has struggled over the decades in attempting to streamline the audit process of a partnership entity.  These entities range from a simple 2-person return to ones which can have hundreds of partners.

Effective for tax years beginning on or after 1/1/2018 the new centralized partnership audit process became effective.  At a high level, a partnership with more than 100 K-1's cannot opt out of the centralized audit process.  The instructions provide guidance on the determination of how to determine who is a partner for this determination.  Further, in order to elect out, each of the partners must be either 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.

Under the centralized audit process, the IRS deals with one specific individual that represents the partnership and only that person.  Should there be an audit adjustment, the partnership is responsible for paying the additional tax and any penalties.  All partners are "bound" with this position.  There are options as to whether the partnership just pays the tax or whether the tax will be allocated to the partners.

If a partnership is eligible to opt out, and in fact does so, then should there be an adjustment at the partnership level, the IRS is required to made any adjustments at the partner level; dealing with each partner separately.

As you can see, this is a somewhat involved area.  This election is made on an annual basis.

Hopefully you now at least have a general understanding and can make your decision.

*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

Centralized Partnership Audit Regime Election Help

@Rick19744,
Thank you for the detailed explanation. I've read through it, and at first glance, it does appear to be pretty straight forward.

Thanks again!

Mike
2020CC
Returning Member

Centralized Partnership Audit Regime Election Help

@Rick19744 . My wife and I have a multi-member LLC, both of us are partners. I understand individuals can elect out. Would my wife and I be considered individuals and there fore qualify to elect out? Something else I read states that partnerships (an LLC with multiple owners) can NOT elect out. Very confusing. Where do we fit in?

Centralized Partnership Audit Regime Election Help

@2020CC 

You are able to elect out, but only under certain circumstances:

  1. This is only possible for an LLC if you live in a community property state.  If not, then you will be required to file a form 1065 (partnership tax return).
  2. If you pass that hurdle, then you need to meet the following:
    1. You and your spouse are the only members
    2. You file a joint tax return
    3. You both materially participate
    4. Split the LLC activity between two Schedule C's on your 1040
    5. I would also recommend that your operating agreement indicate ownership as John and Mary Doe 100% instead of listing each of you separately and showing ownership as 50%. 
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
2020CC
Returning Member

Centralized Partnership Audit Regime Election Help

@Rick19744  Thank you for your reply. I failed to mention that my wife and I live in Florida, which is not a community property state. But we finished our taxes and filed a 1065 so we are squared away. We have another question though. What is the best way for us to pay our quarterly taxes? We understand that we are not required to pay them, as a multi-member LLC, but would like too. For 2020 we chose to make the four payments, two to my social and two to my wife's social. This got a little confusing, although we don't feel will be a problem with the IRS. We also setup our LLC with the IRS's EFTP's system, but since it was with the LLC's EIN I believe this was wrong as again we are not required to pay taxes through the business. Would it be better to just pick one of us and just make all the payments through that one social, since we file a joint tax return? Or what is the most ideal way for us to pay our estimated quarterly taxes?

Centralized Partnership Audit Regime Election Help

Looks like you are getting a solid understanding of what you are needing to do, and working through the few hiccups you have encountered.

Follow-up comments:

  • You are correct in that you do not want to make any estimated tax payments using the LLC EIN.
  • Since you are filing a joint tax return, there is no need to split the estimated tax payments between you and your wife.  That may only lead to confusion on the part of the IRS.
  • Since you have already gone through the EFTP's system once, I would recommend you go through this process again, except setting it up for you personally.  Works well.
    • I also use this portal as well and I can't remember if you have the ability to split the estimated taxes between spouses.  Regardless, I never do since at the end of the day, everything is combined.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
2020CC
Returning Member

Centralized Partnership Audit Regime Election Help

@Rick19744Makes sense. Thank you for all your help!

Centralized Partnership Audit Regime Election Help

You are welcome.

*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
eyerdje
Returning Member

Centralized Partnership Audit Regime Election Help

See Jhart 9869 post 2/26/2021

I will repeat the Jhart context  here and some more precise details to fix the Turbotax business 2021 issue with getting error messages for filling out entity data when on form 1065 p1-3 partnership.  when you only want to use a partner name instead of an entity.

Go to frorm 1065  p1-3

 

go to line 29and check the yes box (elect out of centralized paartneship audit regime)

 

quick zoom to Schedule B-2 

 

fill out schedule B-2 -( names, ssn with dashes, select I for individual . you should see the quantity of  individuals appear on  1065 line 29 from B-2 part III line 3

I spent 5 hours to figure out this work around for a turbotax problem that has been around for a long time

 

PS make sure you have NOT checked the box "this is not a person"  - cant find that box now but it is burried somewhere in this massive mess of tax law and turbotax

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