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#1 Posted : Wednesday, September 19, 2018 9:45:05 PM(UTC)

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The new audit rules can result in the partnership making adjustments to current year income for errors in past years. This in effect could make current members responsible for a tax liability incurred in a year they were not a member. To avoid this possibility we recommended clubs opt-out of the new rules if possible. The main obstacle to an opt-out election for investment clubs is having one or more trusts as partners in the club. So these instructions are for clubs without trusts as partners.
The IRS has recently released draft forms for the 2018 tax year. One question on schedule B has been changed. In recent past years there was a question allowing partnerships to elect to be covered by the new audit rules early. This question is now changed to ask if the partnership elects to opt-out of the new audit rules. If the answer is "Yes" to this question the partnership must complete and file a new schedule, Schedule B2. The draft schedule B2 looks simple. It requires the name of all partners, the tax ID of the partner and a code to identify the type of partner. Trusts may not be partners to qualify a partnership to opt-out using section 6221 of the tax code. In addition a section asks for the number of K-1s being filed with the return. Signing the schedule is acknowledgement that the partnership meets the requirements to opt-out according to section 6221(b)(1)(C) of the tax code. ICLUBcentral is working to incorporate the ability to complete Schedule B2 into its tax printer to make opting out of the new audit rules easy to accomplish.
If a club is disbanding and the final return will be due before 2018 forms are available here are a couple of options, file an extension to file giving you time to use 2018 forms or add a statement to your final return using 2017 forms. Sample language for such a statement is given below.
Section 6221 Election

The [name of club] elects to invoke Section 6221(b) of the Internal Revenue Code. By making this election we wish not to be covered by the provisions of Section 6221 of the Internal Revenue Code which make adjustments in net partnership income be treated at the partnership level.
All partners in this partnership meet the requirements of Section 6221(b)(1)(C) and all partners have been informed that the partnership is making this election. A list of the current partners and their tax identification number is included below. All partners are individuals.

[List of partners with tax ID #]

Russell Malley

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