The implementation of the centralized partnership audit regime (CPAR) has finally arrived. Enacted by the Bipartisan Budget Act of 2015, CPAR wasn’t effective until tax years beginning after December 31, 2017. Many taxpayers and tax practitioners placed it behind the Tax Cuts and Jobs Act on their list of priorities. Now 2019 brings the first filing season under CPAR as 2018 tax returns are filed.

Most partnerships and LLCs that qualify will choose to elect out of CPAR’s application. The election out is available if (1) each partner is an individual, a C corporation, a foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner, and (2) the partnership is required to furnish 100 or fewer Form K-1s for the year. To elect out, a partnership must make an affirmative election each year on its timely filed tax return and file a Schedule B-2 that sets forth the name and taxpayer identification number of every partner and every shareholder of an S corporation that is a partner. The schedule also requires that the type of partner (e.g., individual, C corporation, etc.) be identified.

Electing out of CPAR is straightforward for qualifying partnerships. The partnership tax return Form 1065 specifically asks whether the partnership is electing out and instructs taxpayers to complete a Schedule B-2. However, there is one more requirement. Did you notify all the partners of the election? The Internal Revenue Code requires that a partnership notify each of its partners that it has elected out of CPAR, and the final regulations require that the notice be delivered to the partners within 30 days of the election being made.

There is no prescribed form or manner for the notice, nor is requirement of the notice addressed on Form 1065 or Schedule B-2. The preliminary comments to the proposed regulations say it may be in writing, electronic or other form chosen by the partnership. The IRS has said that it intends to “carefully review” a partnership’s decision to elect out of CPAR to determine whether the election is valid. Partnerships and tax return preparers using tax-preparation software should make sure the partner notification is on the Form K-1s, and if it is not, notice should be sent by whatever manner within 30 days of the tax return’s filing.