The ripple effect of COVID-19 extends to many areas in tax procedure and tax administration. In this post, guest contributor Marilyn Ames discusses a recent IRS revenue procedure that allows partnerships subject to BBA more immediate access to the relief provided by the CARES Act by allowing them to amend Form 1065 and Schedules K-1. Marilyn was an attorney with the Internal Revenue Service Office of Chief Counsel for over 30 years and is a contributing author on Saltzman and Book, IRS Practice and Procedure. Along with Greg Armstrong and Rochelle Hodes, Marilyn wrote the inaugural chapter in the treatise on the BBA centralized partnership audit procedures. Les
In its herculean efforts to implement the economic relief provided by Congress in the CARES Act, the Internal Revenue Service has looked beyond the provisions of Section 7508A of the Internal Revenue Code to other provisions, including those involving partnerships. Under the provisions of the Bipartisan Budget Act (BBA), partnerships became subject to a centralized audit procedure, with limited exceptions. In order to amend a partnership return, Section 6227 of the Code requires the partnership to file an administrative adjustment request (AAR). Under Section 6031(b), a BBA partnership cannot amend the Schedules K-1 after the original partnership return has been filed except to account for audit adjustments in certain circumstances. Generally, the adjustments contained in an AAR for an earlier year are accounted for in the partnership tax return in the year during which the AAR is submitted and any adjustments that do not result in an imputed underpayment (in other words, those that create a possible reduction in tax liability for the partners) are pushed out to the partners for use on the partners’ returns for the year in which the AAR was submitted. Without any adjustments to the BBA partnership audit provisions, if a partnership files an AAR in 2020 for tax years ending in 2018 or 2019 in order to take advantage of the liberalized CARES net operating loss provisions, the partners could possibly have to wait until 2021 when they file their 2020 tax returns to see any effect.
However, Section 6031(b) does allow the Secretary to provide for an exception to the general rule prohibiting the issuance of amended Schedules K-1. The Service has utilized this authority and published Revenue Procedure 2020-23 to give this permission, allowing partnerships more immediate access to the relief provided by the CARES Act by filing an amended Form 1065 and amended Schedules K-1. This is not required – partnerships may still opt to file an AAR to claim the relief provided by CARES should they choose to do so. Additionally, eligible partnerships are not limited to amending the partnership return based solely on changes in the tax law contained in CARES. As noted in Section 3.02 of the revenue procedure, a partnership may amend a return to take into account “any other tax attributes to which the partnership is entitled by law.”
The most important point to note about Rev. Proc. 2020-23 is that it has a VERY short time period in which to act. The option to file an amended partnership return and issue the corresponding Schedules K-1 expires on September 30, 2020.
So what partnerships are eligible to file an amended Form 1065 and issue amended Schedules K-1? Rev. Proc. 2020-23 provides that any partnership that filed a Form 1065 and furnished all required Schedules K-1 for the tax years beginning in 2018 or 2019 prior to the issuance of the revenue procedure may amend. The Service will treat the amended documents as replacements for any prior returns, including any AARs previously filed for these years. If the partnership filed an AAR for the same year as the year of the amended return, the amended return should conform the amended return to the AAR for any partnership items adjusted in the AAR. Section 3.04 provides for coordination with Notice 2019-46 if a partnership applied the proposed GILTI regulations to the return in question. If the partnership return is already being audited, the partnership is not precluded from filing an amended return, but must send notice to the revenue agent in writing prior to or contemporaneously with the filing of the amended return, and provide the revenue agent with a copy when the amended return is filed.
To amend the prior return, the partnership should use a Form 1065 and check the “Amended Return” box. All corresponding amended Schedules K-1 should be included. The preparer of the return should write “FILED PURSUANT TO REV PROC 2020-23” at the top of the return, and should attach a statement with each Schedule K-1 sent to the partners with the same notation.
The partnership may file the documents electronically or using snail mail. As we all know, electronic filing is probably going to result in the Service processing the amended return faster.
Filing an amended partnership under Rev. Proc. 2020-23 will not change the application of the BBA audit procedures, as the revenue procedure is quick to point out. If the partnership was subject to the BBA procedures before filing the amended return, it will remain subject to the BBA audit procedures.
Presumably, once the amended return is filed and the amended Schedules K-1 have been issued, partners can act to utilize any net operating loss carrybacks pursuant to the provisions of the newly-enacted Section 172(b)(1)(D) under the guidance given in Rev. Proc. 2020-24, thus getting refunds into the hands of the partners in a timelier manner.