What is the centralized audit regime under section 6221(b)?
What does section 6221(b) cover?
Section 6221(b) enables qualifying partnerships to opt out of the centralized partnership audit regime — for a specific tax year.
By default, the Bipartisan Budget Act (BBA) rules necessitate the IRS to assess audit adjustments directly against the partnership entity. In the case that the business satisfies the eligibility criteria, making a 6221(b) election acts as an exit strategy from this default partnership-level exam.
How is the default centralized partnership audit regime distinct?
In accordance with the default rules, the partnership itself owes any tax adjustments. It applies regardless of whether the individual partners have changed since the audited year.
Which partnerships can elect out under 6221(b)?
In order to fulfill qualifications for the opt-out, the business should have 100 or fewer partners. Moreover, all partners should be an eligible entity type.
Eligible partner categories are presented below:
- Individuals
- C corporations — plus foreign entities treated as C corporations
- S corporations — subject to specific shareholder counting rules
- Estates of deceased partners
Having a trust or another partnership as an owner will generally disqualify the business from making such an election.
How do you make the 6221(b) election?
The choice is declared to opt out directly on the federal partnership tax return. You are also required to present distinct documentation to the partners.
- The tax ID as well as entity type should be verified for every single partner
- The total partner count should be calculated to confirm it stays at or below the 100-partner limit — s corporation shareholders count toward this total
- The opt-out election should be contained with the timely filed tax return — covering including any valid extensions
- The necessary statements should be delivered to your partners by the required deadline
What happens if you do not elect out?
In the case of remaining under the default CPAR rules, the IRS will calculate an imputed underpayment directly against the business following an audit adjustment.
At that point, the partnership has 2 options:
- pay the assessed tax at the entity level
- submit a push-out election to pass the adjustment down to the partners from the reviewed year — keep a close eye on the clock, as the timeframe to establish such a choice is tight
Work with Dimov Audit
Partnership audit rules have the potential to hit when you least expect them. Dimov Audit can review the partner list, confirm whether 6221(b) is available, and set up a concrete roadmap before an IRS notice arrives.
Reach out to us to discuss your partnership structure & next filing season.
