Recent Developments in Partnership Audits (Part 1)

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When Congress passed the Bipartisan Budget Act of 2015 (BBA) in 2015 I rejoiced, thinking that my struggles with TEFRA had ended. My joy was short-lived, as many partnerships have years still subject to TEFRA provisions. Now as examinations of BBA-subjected partnerships start to ramp up, there are new complexities and struggles. Luckily, Rochelle Hodes, a Principal with Crowe LLP and a former Associate Tax Legislative Counsel in Treasury’s Office of Tax Policy, is here to provide background and highlight important developments. I am fortunate to work with Rochelle in Saltzman and Book, IRS Practice and Procedure, where she and my longtime colleagues on the treatise Marilyn Ames and Greg Armstrong are principal authors on the relatively new and excellent chapter dedicated to BBA issues. Les

A new centralized partnership audit regime was enacted as part of the Bipartisan Budget Act of 2015 (BBA) to replace the TEFRA and electing large partnership audit regimes.  Technical corrections were enacted in March of 2018.  The BBA is generally effective for partnership taxable years beginning on or after January 1, 2018, though certain partnerships were able to elect into the regime early.  Before discussing recent developments in Part 2 of this post, here’s a reminder of what makes BBA so unique:

  • Under BBA, the partnership is liable for tax due as a result of adjustments to partnership-related items unless the partnership elects under section 6226 to “push out” those adjustments to the partners for the year to which the adjustments relate (reviewed year).  The tax imposed on the partnership under BBA is called the imputed underpayment (IU).  A partnership may be able to request certain modifications to reduce the IU.  See section 6225.  Similar to TEFRA, under BBA adjustments to partnership-related items are made at the partnership level.  However, BBA differs from TEFRA regarding assessment and collection of the tax.  Under BBA the IU is assessed and collected at the partnership level, whereas under TEFRA the tax due had to be assessed against and collected from the ultimate tax paying partners. 
  • Unlike TEFRA, BBA applies to all partnerships unless the partnership is eligible to, and does, make an election out of BBA under section 6221(b).  The election out is an annual election made on the partnership’s timely filed original return.  The rules do not provide an ability to make a late election out of BBA.  Generally, a partnership with more than 100 partners or with partners that are passthrough entities or disregarded entities, grantor trusts, or nominees are ineligible to elect out of BBA.  Special rules apply that allow partnerships with S corporation partners to elect out of BBA (basically, the S corporation and each of its shareholders is counted for purposes of determining whether the 100-partner threshold is exceeded).
  • BBA replaced the tax matters partner (TMP) under TEFRA with a partnership representative (PR) who has the sole authority to act on behalf of the partnership and whose action binds the partners and the partnership under the BBA.  See section 6223.  The PR is designated annually on the partnership return.  Unlike the TMP, the PR does not have to be a partner, but it does have to have a substantial presence in the US (generally, a US TIN, phone number, and reasonable availability to meet with the IRS).  If the PR is an entity, the partnership must also appoint an individual who can act on behalf of the PR called the designated individual (DI), who also must have a substantial presence in the US.
  • Amended partnership returns and amended Schedules K-1 are generally not permitted under BBA.  Instead, adjustments to partnership returns that have been filed must be made on an administrative adjustment request (AAR) under section 6227, which must be signed by the PR.  A partnership can either pay the IU (and apply some of the modifications to reduce the IU) or push out the adjustments to the partners for the year being adjusted.  A partnership generally has three years from the date the partnership return is filed to file an AAR, except no AAR may be filed for a tax year after the IRS sends a notice of administrative proceeding (NAP) under section 6231(a)(1) for that tax year (IRS Letter 5893/5893A).
  • Partners receive their allocable share of adjustments from a push out on a Form 8986. 
    • Under section 301.6226-3 of the regulations, partners that are not passthrough partners (generally individuals and C corporations) are required to determine the increase or decrease in tax in the reviewed year (and any intervening year) as a result of taking their allocable share of adjustments on the Form 8986 into account (plus interest and penalties, if applicable) and report that amount as an additional (or reduction in) chapter 1 tax on their income tax return for the year the initial partnership making the push out election furnished the Forms 8986 to their direct partners (reporting year).
    • Under section 301.6226-3(e), passthrough partners (including partnership partners and partners that are S corporations) must file a Form 8985 to the IRS and either pay the IU attributable to their allocable share of adjustments or push those adjustments out to their partners for the reviewed year.  In the case of push out, the passthrough partner must also file Forms 8986 and furnish a copy to its reviewed year partners. 

Tomorrow I will discuss two recent significant BBA developments.

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