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Four takeaways from the first year of CPAR

2022 year-end tax letter

Oct. 26, 2022 · Authored by Colin J. Walsh, Derek Reuter

The centralized partnership audit regime (CPAR) revolutionized how the IRS examines most Forms 1065, U.S. Return of Partnership Income. As a consequence to CPAR’s dramatic changes, most partnerships are unable to amend Form 1065; instead, they will now “amend” Form 1065 via an administrative adjustment request (AAR). Possibly the most critical concept in CPAR is the imputed underpayment (IU). The IU is a partnership-level income tax for any positive adjustments (e.g., increases to income, decreases to expenses, decreases to credits) to Form 1065. To the extent the partnership does not wish to pay the IU, there is a complex system to push the positive adjustments to the partners. Prior to CPAR, the IRS was responsible for administering any adjustments made to a Form 1065. CPAR essentially shifts this burden to partnerships and their advisors..

CPAR was created in 2015 via the Bipartisan Budget Act (BBA). The BBA dictated that CPAR was first mandatory for the 2018 Form 1065. Essentially, this meant the IRS would implement CPAR in 2020, which is when 2018 Forms 1065 would be examined and amended. However, the Coronavirus Aid, Relief and Economic Security (CARES) Act further delayed the implementation of the CPAR rules for AARs. Moreover, the IRS opened little to no new examinations during the pandemic. Functionally, the pandemic further delayed the implementation of CPAR until 2022. What follows are four takeaways from 2022, our first full CPAR year.

1. CPAR impacts more than just CPAR partnerships

Partners in a CPAR partnership are (finally) beginning to receive push-out statements, i.e., IRS Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s). If a pass-through partner receives a Form 8986 that reports positive adjustments, the pass-through partner can either (a) pay an imputed underpayment or (b) push the positive adjustments to its owners. These options apply equally to S corporations and non-CPAR partnerships. A pass-through partner’s failure to make the push-out election by the extended due date of the AAR partnership’s return will result in an IU assessment against the pass-through partner. Non-pass-through partners, on the other hand, must report the contents of the pushout statement on the income tax return for the year in which they receive a push-out statement.

For example, Partnership A files a 2020 AAR in 2022. Partner B, an individual, reports the adjustments on the push-out statement via the 2022 Form 1040. Partner C, an S corporation, has the option to push out any positive adjustments or simply pay the IU.