The centralized partnership audit regime (CPAR) reshaped how the IRS audits partnerships, shifting audits from partners to the partnership itself. What does this mean for tax professionals advising partnerships today?

Why CPAR matters to your clients

CPAR affects every partnership, from small partnerships to large ones.

• Centralized audits: The IRS audits and assesses tax at the partnership level, not the individual partner level, resulting in streamlined collections.
• Created liability shifts: Current partners can become liable for taxes on income earned in years prior to their partnership.
• Required proactive elections: Partnerships eligible to opt out must file timely elections each year to avoid entity-level assessments.

Example: Partnership-level liability

Riverstone Architects LLC opened for business on Jan. 1, 2024, with three equal individual partners. Suppose the IRS later audits Riverstone’s 2024 Form 1065, U.S. Return of Partnership Income, and finds unreported income. In that case, the entire assessment would initially be billed to Riverstone itself in the year the audit is completed (the adjustment year), rather than to the three partners on their individual 2024 income tax returns.

Suppose Riverstone understated $90,000 of architect fees (income) on its 2024 Form 1065. During a 2027 audit, the IRS proposes an adjustment. Absent any special election, Riverstone would pay the imputed underpayment due in 2027, even though the income related to its 2024 operations.

Key CPAR features tax pros must know

Opting out of CPAR

Eligible partnerships can elect out annually. However:

• The partnership must have 100 or fewer partners at all times during the tax year, and all partners must be eligible partners.
• The election is made by filing Schedule B-2 (Form 1065), Election Out of the Centralized Partnership Audit Regime, with a timely Form 1065 and notifying the partners within 30 days.

Consistency in partner reporting

Partners must report items exactly as shown on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., unless they file Form 8082, Notice of Inconsistent Treatment. Failure to do so can result in direct partner-level tax and penalties.

Push-out election

Instead of paying at the partnership level, a partnership can elect to “push out” the adjustments to the partners:

• Timing: The election must be made within 45 days of the final partnership adjustment notice.
• Process: The partnership must provide each reviewed-year partner (i.e., partners during the tax year being audited) and the IRS a statement of each partner’s share of the adjustments as determined in the notice of final partnership adjustment.
• Binding election: Once made, the election is irrevocable unless the IRS allows otherwise.

This approach allows the tax consequences of adjustments to be handled at the partner level, rather than by the partnership itself.

Example: Ortega Brewery was audited in 2025 for its 2022 tax year and was determined to have underreported its income. It can elect to push out the adjustment, making the partners from 2022 (instead of the current partners) liable for the additional tax.

No push-out election

If a partnership doesn’t elect to push out, it pays the imputed underpayment itself in the adjustment year, regardless of partner changes since the audited year.

Why this matters for your practice

Understanding CPAR ensures you can:

• Advise clients on whether to elect out each year
• Prepare for potential partnership-level liabilities
• Guide partners on reporting consistency to avoid penalties
• Navigate push-out elections to minimize tax impact for current partners

Final takeaway

CPAR fundamentally changes partnership audits, placing responsibility on the entity instead of the partners. To avoid surprises, stay proactive by reviewing election eligibility annually and discussing these rules with your partnership clients.

Learn more about CPAR by purchasing the Preparing Partnership Returns self-study.