Recent Developments in Partnership Audits (Part 2)

In yesterday’s post Rochelle Hodes, Principal with Crowe LLP, provided background on BBA, emphasizing what makes its rules unique in tax procedure. Today’s post will briefly discuss two important BBA developments, the IRS’s Large Partnership Compliance Program and significant ABA Tax Section comments on proposed BBA regulations. Les

Large Partnership Compliance (LPC) Program

The IRS is scheduled to begin the LPC Program this month, starting with the 2019 tax year.  The LPC Program is modeled off of the Large Corporate Compliance (LCC) Program, which replaced the Coordinated Industry Case (CIC) Program. 

LB&I has provided its employees interim guidance dated October 21, 2021 to implement an LPC Pilot Program.  The four-part framework for the Pilot set forth in the interim guidance is consistent with the information IRS executives have previously provided regarding the program.


1. Identification

According to the interim guidance, the first part of the framework is “[i]dentifying the largest partnership cases by focusing on the characteristics of the largest Form 1065 filers.”  The  IRS will identify “large partnerships” and then use data analytics to determine partnership returns with compliance risk.    When asked at a recent ABA Tax Section panel about what factors contribute to a partnership being included in LPC (and thus being considered “Large”), the IRS official identified factors such as asset and revenue size, volume and size of foreign investments/investors, as well as items reflected on the Schedule K-1.  The interim guidance notes that the identification process and factors to determine what is a large partnership may change as more information is gained through the examination process.

2. Modeling and Classification

The second part of the framework is “[d]eveloping improved methods to identify and assess the compliance risk presented by [large partnerships].” The IRS official at the ABA Tax Section panel explained that after the identification of the partnership as “large”, a human “classifier” does a further risk assessment.  In addition, the assigned revenue agent will do her own risk assessment of the return.

The IRS official also provided color around the use of data analytics, stating that IRS is using information that it has been gaining from partnership examinations and, presumably, returns and Schedules K-1.  The IRS has recently required more detailed information be included with partnership tax returns and Schedules K-1.  That data will only be enhanced when the Schedules K-2 and K-3 are filed with 2021 partnership tax returns. 

3. Exam Procedures

The third part of the framework is “[c]onsidering examination processes and tools that will allow [the IRS] to better audit this population.” According to the interim guidance, IRM procedures applicable to LB&I, partnerships, and the BBA will generally be followed, including LB&I exam planning procedures in IRM  The interim guidance identifies exceptions to the procedures, including one that provides that LPC returns cannot be merely “surveyed”; they must be examined.  Another exception provides that the exam team must consider or develop all issued identified ahead of time by the classifiers. This will limit the assigned revenue agent’s discretion and could result in longer, more detailed examinations than might otherwise be warranted. 

4. Feedback

The fourth part of the framework is enhancing the IRS’ understanding of large partnership compliance issues through feedback.  The interim guidance describes procedures whereby technical and procedural feedback will be gathered to improve data analytics and risk identification, including a sharepoint site for LPC, as well as LPC networking calls.

One of the things that representatives can expect from BBA examinations, regardless of whether the examination is under LPC, is an early request for what might seem as a longer extension of the period of limitations on adjustment.  The reason for this is largely a function of the statutory requirement that partnerships must be allowed 270 days after the notice of proposed partnership adjustment is issued to request modification.  Additional time constraints on the examination include two opportunities for the PR to request Appeals consideration (the first to request Appeals consideration of the adjustments and the second to request Appeals consideration of a denial of a request for modification).  For more on these processes, see the graphic the IRS has posted on its website depicting the BBA examination process. 

Representatives should be prepared for revenue agents who lack experience with BBA, and in some cases, who lack experience in partnership tax.  The IRS official at the ABA Tax Section panel stated that they have hired a number of new revenue agents with partnership experience and assigned experienced revenue agents to partnership audits.  It is too early to evaluate how this will affect BBA examinations.

Even before this month, representatives have seen a significant uptick in the number of partnership audits.  It is likely that this trend will continue, amped up by the rollout of the new LPC Program.

ABA Tax Section Comments on the November 2020 Proposed Regulations

As Greg Armstrong and I discussed in our prior blog post entitled Treasury and IRS Release New Round of BBA Partnership Audit Proposed Regulations, on November 24, 2020, Treasury and the IRS published proposed regulations under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA).  The ABA Tax Section provided comments on the proposed regulations in a letter dated October 8.  The comments address provisions in the proposed regulations that would implement special enforcement provisions enacted as part of the technical corrections, proposed changes to the cease to exist rules under section 6241(7), and proposed changes that would include partnership-related items that do not result in an adjustment to income, gain, loss, deduction, or credit (“non-income adjustments”) to be included in the imputed underpayment, among other topics. Following are some highlights of the comments:

Special enforcement matters

Section 6241(11), providing rules for special enforcement matters, was added to the BBA regime as part of the technical corrections enacted in 2018.  Essentially, these rules allow the IRS to adjust a partnership-related item at the partner level without having to open an examination of the entire partnership. Prop. Reg. § 301.6241-7 implements this provision.  The comments include several recommendations regarding Prop. Reg. § 301.6241-7, including recommendations not to finalize three areas identified as special enforcement matters:  Prop. Reg. § 301.6241-7(b) regarding partnership-related items underlying or related to non-partnership-related items; Prop. Reg. § 301.6241-7(f) allowing adjustment of partnership-related items at the partner level even if the period for adjustment at the partnership level has expired if the period of limitations at the partner level is still open or they agree in writing; and Prop. Reg. § 301.6241-7(g) regarding a partnership’s liability for chapter 1 taxes, penalties and interest.

Cease to exist

The cease to exist rules under section 6241(7) generally provide that if the partnership is unable to pay the imputed underpayment, the adjustments are allocated to former partners who will have to pay tax due as a result of taking these adjustments into account.  This is a round-about way for the IRS to collect tax if the partnership won’t pay because it requires allocation of the adjustments to the former partners and computation of the tax due from each partner as a result of taking the adjustments into account.  The technical corrections added section 6232(f) which allows collection of an unpaid imputed underpayment from the former partners.  There are no regulations describing how section 6232(f) will work. 

The proposed regulations make several revisions to the cease to exist regulations to, as the Preamble explains, coordinate the cease to exist rules with section 6232(f).  The primary recommendation made by the comments is to provide guidance on section 6232(f) before changing the regulations under section 6241(7).

Non-income item adjustments

Adjustment of certain partnership-related items do not result in a change to any party’s tax liability.  For instance, a change to a partner’s capital account maintained by the partnership, by itself, does not result in a change in a partner’s tax liability unless and until an event occurs that causes that capital account information to matter in determining tax liability.  Prior to the proposed regulations, there was no guidance specifically addressing non-income item adjustments.  The proposed regulations would include non-income item adjustments in the computation of the imputed underpayment, regardless of whether the adjustment results in a change in tax liability of any party.  This means that if the only adjustment to the 2018 return is a $100 positive adjustment to a non-income item, there would be a $37 imputed underpayment.  This is true even if no partner’s tax liability would have change had the item, as later adjusted, been taken into account when the 2018 return was filed.


For many years, the partnership audit rate was very low, especially when compared to corporations.  All that is changing.  With LPC and BBA, IRS is increasing its focus on partnership compliance and enforcement.  Taxpayers and practitioners should be prepared for increased partnership audits and compliance initiatives.

Recent Developments in Partnership Audits (Part 1)

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.

Treasury and IRS Release New Round of BBA Partnership Audit Proposed Regulations

Today we welcome back guest blogger Rochelle Hodes, a Principal with Crowe LLP and a former Associate Tax Legislative Counsel in Treasury’s Office of Tax Policy.  Rochelle discusses the new proposed regulations under the BBA partnership audit rules that were released just before Thanksgiving.  While the proposed rules primarily address special enforcement matters, the proposed rules would also amend the final BBA regulations in significant and consequential ways that practitioners and taxpayers ought to be attune to.  Rochelle would like to thank her former government colleague Greg Armstrong, a Director with KPMG LLP, for his helpful review and comments.  Rochelle and Greg worked together on, and continue to update, Chapter 8A in Saltzman Book IRS Practice and Procedure regarding the BBA partnership audit rules. Les

On November 24, 2020, Treasury and the IRS published proposed regulations under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA).  The BBA regime generally applies to partnership tax years beginning in 2018.  This post addresses proposed §301.6221(b)-1(b)(3)(ii)(G) regarding eligibility to elect out of BBA if a partner is a qualified S corporation subsidiary (QSub), proposed §301.6241-3 regarding treatment of partnerships that cease to exist, and proposed §301.6241-7 regarding treatment of special enforcement matters. In general, the proposed applicability date for these rules is November 20, 2020.

These proposed regulations are being released at the end of a presidential administration.  It is unclear how finalizing these proposed regulations will fit into the new administration’s priorities and whether policy decisions embedded in the proposed regulations will be reconsidered.  However, even with this uncertainty, the proposed regulations are important because they give taxpayers and practitioners a window into the IRS’s thinking on the BBA rules at a time when it is increasing its focus on partnership reporting and compliance.



All partnerships required to file Form 1065 are subject to the BBA regime unless the partnership is eligible to elect out of the regime and does so on its timely filed original return.  The election out of BBA is an annual election.  

A partnership is eligible to elect out of BBA if the partnership has 100 or fewer eligible partners.  Partnerships, trusts (including grantor trusts), disregarded entities, and nominees are not eligible partners and therefore partnerships with these types of partners cannot elect out of BBA. 

Section 6221(b) specifically provides that an S corporation is an eligible partner.  However, in the case of an S corporation a special rule applies for purposes of determining whether the partnership has 100 or fewer partners.  Under the special rule, all shareholders to whom the S corporation is required to furnish a Schedules K-1, plus the S corporation itself, are counted as a partner to determine whether the number of partners exceeds 100.  

Under the proposed regulations, a QSub is not an eligible partner, and therefore, a partnership with a QSub cannot elect out of BBA.  This is a reversal of the position taken by the IRS and Treasury in Notice 2019-06.  In Notice 2019-06, the IRS identified partnerships that are owned by a QSub as a special enforcement issue because such partnerships could have more than 100 owners when looking through the QSub to the S corporation and its shareholders. Accordingly, Notice 2019-06 stated that generally a partnership with a QSub as a partner would not be eligible to elect out of BBA, but that Treasury and the IRS intended to publish proposed regulations to allow partnerships with QSub partners to elect out of BBA under rules similar to S corporations.   But why did Treasury and the IRS reverse its position in Notice 2019-06?  It appears that a long simmering debate among practitioners about the nature of a QSub may be the cause.  The preamble includes a discussion of two comments addressing a rationale not to prohibit partnerships held directly by a QSub from electing out of BBA: one that relies on the fact that a QSub is a C corporation and the other that relies on the fact that for partnership reporting the S corporation, not the QSub, is treated as the partner.  The preamble then describes the reason for changing the government’s position in Notice 2019-6 as follows:

“Although Notice 2019-06 states that the proposed regulations would have applied a rule similar to the rules for S corporations under section 6221(b)(2)(A) to partnerships with a QSub as a partner, the Treasury Department and the IRS have reconsidered that approach.  Under § 301.6221(b)-1(b)(3)(ii), partnerships that have disregarded entities as partners may not elect out of the centralized partnership audit regime.  QSubs are treated similarly to disregarded entities for most purposes under the Code in that both QSubs and disregarded entities do not file income tax returns but instead report their items of income and loss on the returns of the person who wholly owns the entity.”  

85 FR 74943 (November 24, 2020).

Treatment Where a Partnership Ceases to Exist

Section 6241(7) provides that if a partnership ceases to exist before a BBA partnership adjustment takes effect, such adjustment shall be taken into account by the former partners of such partnership under regulations prescribed by the Secretary.

The current regulations under §301.6241-3 generally provide that partnership adjustments take effect when all amounts due under BBA resulting from the adjustment are fully paid.  The current regulations also provide that the former partners are the partners for the adjustment year with respect to the reviewed year to which the adjustments relate, but if there are no partners in that year, the former partners are the partners during the last taxable year for which the partnership filed a return.

The proposed regulations would modify several parts of the cease-to-exist regulations, but the two most consequential are the rules for when an adjustment takes effect and who are former partners.  The proposed regulations provide that the partnership adjustments take effect when the adjustment becomes finally determined, when there is a settlement, or if the adjustment relates to an item on an administrative adjustment request (AAR), when the AAR is filed. 

Under the proposed regulations, former partners would be 1) the partners during the last taxable year for which the partnership filed a return or an AAR or 2) “the most recent persons determined to be partners of the partnership in a final determination (for example, a defaulted notice of final partnership adjustment, final court decision, or settlement agreement) binding on the partnership.”  The proposed regulations do not set up an order of priority of which condition would take precedence.

The preamble to the proposed regulations states that these changes are necessary to coordinate section 6241(7) with section 6232(f), which was enacted by the Tax Technical Corrections Act of 2018.  Section 6232(f) provides that the IRS can assess tax upon the adjustment year partners if the partnership fails to pay the imputed underpayment within 10 days of notice and demand.  Section 6232(f) includes a rule allowing assessment against former partners determined under section 6241(7) if the partnership has ceased to exist.  Though section 6232(f) has been on the Treasury and IRS Priority Guidance Plan for a while now, no guidance under this section has been issued to date.  

Special Enforcement 

Section 6241(11) generally provides that in the case of partnership-related items which involve special enforcement matters, the Secretary may prescribe regulations to provide that BBA does not apply to the items and that the items are subject to special rules necessary for the effective and efficient enforcement of the Code.  The statute lists certain special enforcement areas, including termination and jeopardy assessments, criminal investigations, and indirect methods of proof of income.  The IRS had similar statutory authority with respect to special enforcement matters under TEFRA.

In addition to the special enforcement areas described above, the proposed regulations identify other special enforcement matters:

  • Partnership-related items underlying non-partnership-related items.  This provision would allow the IRS to determine that the BBA rules do not apply to adjustments of partnership-related items if all of the following apply:
    • An examination is being conducted of a person other than the partnership,
    • A partnership-related item is adjusted, or a determination regarding a partnership-related item is made, as part of, or underlying an adjustment to a non-partnership-related item of the person whose return is being examined, and 
    • The treatment of the partnership-related item on the Schedule K-1 or the partnership’s books and records is based in whole or in part on information provided by the person whose return is being examined.  
  • Controlled partnerships and extensions of the partner’s period of limitations.  This provision would allow the IRS to adjust partnership-related items outside of BBA if the period of limitations to make partnership adjustments under section 6235 has expired but the partner’s period of limitations on assessment for chapter 1 tax has not expired.  This provision applies to direct or indirect partners that are related to the partnership under section 267(b) or section 707(b) or direct or indirect partners that consent to extend the period of limitations to adjust and assess any tax attributable to partnership-related items. 
  • Penalties and taxes imposed on the partnership under chapter 1.  This provision would allow the IRS to adjust any tax or penalty imposed on, and which is the liability of the partnership, under chapter 1 of the Code without regard to BBA.  It would also allow the IRS to “adjust any partnership-related item, without regard to [BBA], as part of any determination made to determine the amount and applicability of the tax, penalty, addition to tax, or additional amount being determined without regard to [BBA].  Any determinations under this [provision] will be treated as a determination under a chapter of the Code other than chapter 1 for purposes of § 301.6241-6 [coordination with other chapters of the Internal Revenue Code].”

ACA Penalty Notices May Not Meet Section 6751(b) Requirements

We welcome back guest blogger Rochelle Hodes.  Rochelle is a Principal in Washington National Tax at Crowe LLP and was previously Associate Tax Legislative Counsel with Treasury. As we prepare to gear back up for IRS enforcement activity, she provides a timely discussion of the ever popular IRC 6751(b) and another way it may help your client when the IRS seeks to penalize.  Keith

Section 6751(b)(1) generally provides that no penalty can be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.  Written supervisory approval is not required to impose a penalty under Section 6651, 6654, or 6655.  Written supervisory approval also is not required to impose a penalty that is automatically calculated through electronic means. 

Section 6751(b) has been covered many times in the Procedurally Taxing blog. Generally, the Tax Court will not sustain the IRS’s assertion of a penalty if the IRS cannot demonstrate that written supervisory approval is not obtained prior to the initial determination of assessment of the penalty.  The latest in this line of cases is Kroner v. Commissioner, T.C. Memo. 2020-73 (June 1, 2020), which further fine-tunes earlier holdings regarding when the initial determination of the penalty is made. 


Prior to Kroner, the Tax Court ruled in Clay v. Commissioner, 152 T.C. 223, 249 (2019), blogged here, and Belair Woods, LLC v. Commissioner, 154 T.C. ___ (Jan. 6, 2020), blogged here, that the initial determination is the date on which the IRS formally communicates to the taxpayer Examination’s determination to assert a penalty and notifies the taxpayer of their right to appeal that determination.  In Clay, that court held that the initial determination was the date that the IRS issued the revenue agent’s report (RAR) and the 30-day letter. In Belair, the court held that the initial determination was the date that the IRS issued the 60-day letter, which in the case of a TEFRA partnership is the notice that communicates Examination’s determination that penalties should be imposed and notifies the taxpayer of their right to go to Appeals. 

In Kroner, the IRS issued a Letter 915, which is an examination report transmittal, to notify the taxpayer that Examination is proposing penalties and that the taxpayer has a right to go to Appeals.  Later, the IRS sent the taxpayer an RAR and a 30-day letter.  The written supervisory approval for penalties was issued after the Letter 915 was sent and before the RAR and 30-day letter were sent.  The Tax Court held that regardless of what the IRS calls the notice that provides the taxpayer with its determination of penalties and notification of the right to go to Appeals and regardless of the IRS’s intent, the initial determination for purposes of section 6751(b) is the first time examination determines that it will assert the penalty and notifies the taxpayer that they have a right to appeal that determination.  In Kroner, the court held that this occurred when the IRS issued the Letter 915.  Accordingly, written supervisory approval was issued after the initial determination for purposes of section 6751(b), and the penalty was not sustained.

On May 20, 2020, the IRS issued an immediately effective interim IRM on the timing of supervisory approval:

For all penalties subject to section 6751(b)(1), written supervisory approval required under section 6751(b)(1) must be obtained prior to issuing any written communication of penalties to a taxpayer that offers the taxpayer an opportunity to sign an agreement or consent to assessment or proposal of the penalty.

Not long before Kroner was decided and the interim IRM guidance above was released, I had a client who received an IRS form letter, Form 5005-A (Rev 7-2018), imposing immediately assessable information reporting penalties under section 6721 and section 6722 for 2017 for failure to timely file Forms 1094-C and 1095-C.  This letter is one of several form letters that are being issued under the IRS’s ACA employer compliance initiative. Under section 6056, employers are required to file and furnish these ACA-related forms to report offers of health coverage. 

The Form 5005-A states that the taxpayer can agree with the penalty and pay it.  If the taxpayer disagrees, the letter states that the taxpayer will “have the opportunity to appeal the penalties after we send you a formal request for payment.” A Form 866-A, Explanation of Items, is attached explaining the basis for assertion of penalties.  The conclusion section states: “Subject to managerial approval, because the Employer failed to file Form(s) 1094-C and 1095-C and furnish Forms 1095-C as required pursuant to section 6056, the employer is subject to the penalties under IRC 6721 and IRC 6722 calculated above.”

The Letter 5005-A and Form 866-A are striking in three regards:  1) The letters clearly communicate Examination’s determination to impose the penalty; 2) the Letter 5005-A is less clear about the opportunity to go to appeals because it delays the opportunity until a formal request for payment is made, but there is clear notification that the right to go to Appeals exists and can be exercised; and 3) the Form 866-A takes the guess work out of whether there was supervisory approval—it states affirmatively that there has not yet been supervisory approval. 

Kroner makes it clear that the name or number of the form the IRS uses to communicate the determination and right to appeal is of no consequence.  As applied to the Letter 5005-A, there is a determination and arguably there is notification of the right to appeal, therefore, the date of this notice is the initial determination of the penalty.  Since according to the Form 866-A there was no supervisory approval before the date the Letter 5005-A was issued, the IRS has failed to satisfy section 6751(b) and the penalties should not apply. 

Even if the “notice of the right to go to Appeals” prong of Kroner is not satisfied, the Letter 5005-A clearly meets the standard for when supervisory approval is required under the interim IRM provisions because the taxpayer is provided the opportunity to agree with and pay the penalty.  While the interim IRM provisions were issued on May 20, 2020, they represent the IRS interpretation of how they should be complying with section 6751(b).  Therefore, failure to comply with the interim IRM provisions in the past should be a failure to comply with section 6751(b). 

IRS is currently sending penalty notices that were being held back due to the pandemic.  For penalties other than sections 6651, 6654, and 6655, practitioners should carefully review notices to evaluate whether section 6751(b) applies and if so, whether the letter is an initial determination required to be preceded by written supervisory approval.

Tax Court Adopts Final Rules For BBA Partnership Audit Regime

Today we welcome Greg Armstrong and Rochelle Hodes to the community of Procedurally Taxing guest posters. Greg is a Director with KPMG, LLP Washington National Tax in the Practice, Procedure, & Administration group in Washington D.C. and former Senior Technician Reviewer with the IRS Office of Chief Counsel. Rochelle is a Principal in Washington National Tax at Crowe LLP and was previously Associate Tax Legislative Counsel with Treasury.  Both Greg and Rochelle in their immediate prior positions with IRS and Treasury respectively spent considerable time working on the new partnership audit regime enacted to replace TEFRA as part of the Bipartisan Budget Act of 2015 (BBA) and as revised in subsequent technical legislative corrections. Rochelle is a Contributing Author on the BBA chapter that will be published this fall for Saltzman and Book IRS Practice & Procedure, and Greg has contributed over the years in updating and revising the treatise.

In this post, Greg and Rochelle discuss the Tax Court’s amendments to its Rules of Practice as relating to the BBA regime. Les

On July 15, 2019 the United States Tax Court announced that it had adopted final amendments to its Rules of Practice and Procedure to address actions under the new partnership audit regime enacted by BBA. The final amendments, which were first introduced as proposed and interim amendments on December 19, 2018, add a new Title XXIV.A (Partnership Actions under BBA Section 1101) and also make conforming and miscellaneous amendments.  New Title XXIV.A is effective as of December 19, 2018 and generally applies to partnership actions commenced with respect to notices of final partnership adjustment (FPAs) for partnership taxable years beginning after December 31, 2017.  The new rules also apply to actions commenced with respect to FPAs for partnership taxable years for which an election under §301.9100-22 is in effect.    

The following post offers a high level summary of the highlights of the Court’s new rules with respect to the BBA regime.  Because this post is focused on the new Tax Court rules, only a summary of the BBA provisions relevant to understanding the Court’s rules are discussed.  For a more robust discussion of the BBA provisions, see the latest update to Saltzman and Book, IRS Practice and Procedure, which includes a new chapter 8A entitled “Examination of Partnership Tax Returns under the Bipartisan Budget Act of 2015”.


The Tax Court’s rules reflect the prominent and powerful role of the partnership representative (PR) under the BBA.  The PR is the individual or entity that has the sole authority to act on behalf of the partnership for purposes of the BBA and replaces the Tax Matters Partner (TMP) concept that existed under TEFRA.  Pursuant to section 6223(a) and the regulations thereunder, a partnership subject to BBA must designate a PR for each taxable year.  If the IRS determines that there is no PR designation in effect for the taxable year, the IRS may select the PR.  If the partnership designates an entity as the PR, the regulations require that the partnership also appoint a designated individual to act on behalf of the entity PR.

Rule 255.2 provides that a BBA partnership action is commenced like any other action in the Tax Court – by filing a petition.  The caption of the petition, and any other paper filed in a BBA partnership action, must state the name of the partnership as well as the name of the PR.  Rule 255.1(d).  This is consistent with TEFRA Rule 240(d), Form and Style of Papers, which requires the caption to state the name of the partnership and the partner filing the petition, and whether the partner is the TMP.  Since under BBA only a PR can bring a partnership action in Tax Court, and because no partner (unless they are the PR) can file a petition, it makes sense that the PR is named in the caption in addition to the partnership.  The body of the petition must also identify the PR’s place of legal residence or principal place of business if the PR is not an individual.  Rule 255.2(b).  Interestingly, Rule 255.2(b) does not require the petition to provide the name or address of the designated individual.  The rule does require the petition to indicate whether the PR was designated by the partnership or selected by the IRS.

Identification and Removal of a Partnership Representative by the Court

New Rule 255.1(b)(3) defines the PR for purposes of BBA partnership actions to mean the partner (or other person) designated by the partnership or selected by the IRS pursuant to section 6223(a), “or designated by the Court pursuant to Rule 255.6.”  Rule 255.6 sets out circumstances in which the Court may act to identify or remove a PR in a partnership action under BBA.  The first such circumstance is if at the time of commencement of the action the PR is not identified in the petition.  Rule 255.6(a).  The second such circumstance is if after the commencement of the case the Court “may for cause remove a partnership representative for purposes of the partnership action.”  Rule 255.6(b).  The Court’s rule requires that before removal there must be notice and an opportunity for a hearing.  Neither Rule 255.6(b) nor the explanation to the rule delineate what causes would warrant removal.

Rule 255.6(a) provides that where there is no PR identified in the petition at the beginning of the case, the Court “will take such action as may be necessary to establish the identity” of the PR.  Rule 255.6(a) is vague as to what action might be necessary to establish the identity of the PR.  If no PR is identified, one possible outcome may be that the case is dismissed on the ground that a proper party did not file the petition.

Rule 255.6(b) provides that “if a partnership representative’s status is terminated for any reason, including removal by the Court, the partnership shall then designate a successor partnership representative in accordance with the requirements of section 6223 within such period as the Court may direct.”  Rule 255.6(b) does not address what happens if the partnership is unable or unwilling to designate a successor PR.  It is also interesting that Rule 255.6(b), while referencing the requirements of section 6223, only cites the authority of the partnership to designate a PR, and does not cite the Commissioner’s authority to select a PR.  The ability of the Commissioner to select a PR for the partnership raises intriguing issues that also arose in the early days of TEFRA.  See, e.g., Computer Programs Lambda v. Comm’r, 90 TC 1124, 1127-28 (1988).

Per the explanation to Rule 255.6, the authority to identify or remove a PR “flows from the Court’s inherent supervisory authority over cases docketed in the Court.” The explanation to Rule 255.6 also states, however, that the rule “does not take a position on whether the Court may appoint a partnership representative.”  In the context of a TEFRA partnership action, Rule 250 permits the Court to appoint a TMP in certain circumstances.  Notably, Rule 250(a) provides that if there is no TMP at the outset of the TEFRA action, the Court “will effect the appointment of a tax matters partner.”  Similarly, Rule 250(b) provides that where the TMP has been removed by the Court or the TMP’s status has otherwise terminated, the Court “may appoint another partner as the tax matters partner” if the partnership has not designated one in the time frame prescribed by the court.  Consistent with the explanation to Rule 255.6, and unlike Rule 250, Rule 255.6 does not contain language permitting the Court to appoint a partnership representative.   However, the explanation to Rule 255.6 appears to leave the door open for the Court to appoint a PR if the facts warrant such action, though it is unclear what those facts might be.

Jurisdiction Over the Imputed Underpayment and Modifications

Rule 255.2(b) also reflects the fact that the partnership as a result of an action under BBA may be liable for tax, i.e., an imputed underpayment determined under section 6225.  An imputed underpayment is initially computed by the IRS during the administrative proceeding, but may be modified if timely requested by the partnership and approved by the IRS.  The modified imputed underpayment and any modifications approved or denied by the IRS will be reflected in the FPA mailed to the partnership. 

Rule 255.2(b)(5) requires that the petition reflect the amount of the imputed underpayment determined by the Commissioner and “if different from the Commissioner’s determination, the approximate amount of the imputed underpayment in controversy, including any proposed modification of the imputed underpayment that was not approved by the Commissioner.”  Further, Rule 255.2(b)(6) requires the petition to clearly and concisely state each error that the Commissioner allegedly committed in the FPA “and each and every proposed modification of the imputed underpayment to which the Commissioner did not consent.”  Rule 255.2(b)(7) provides the petition should also include “[c]lear and concise lettered statements of the facts on which the petitioner bases the assignments of error and the proposed modifications.”

The petition requirements set forth in Rule 255.2(b) make clear that the Tax Court will have jurisdiction to redetermine an imputed underpayment reflected in the FPA, including any “proposed modifications” to the imputed underpayment that were not approved by the Commissioner.  Prior to the Tax Technical Corrections Act of 2018, Public Law 115-141 (TTCA), the issue of jurisdiction over imputed underpayments and modifications was unsettled.  By amending the definition of partnership-related item to specifically include an imputed underpayment while also amending section 6234(c) to provide the court with jurisdiction “to determine all partnership-related items” for the taxable year to which the FPA relates, the TTCA amendments make clear that the court has jurisdiction to determine an imputed underpayment.  Therefore, the Code provides the court with jurisdiction to determine an imputed underpayment, including any modifications to that imputed underpayment that were denied by the Commissioner.  This is reflected in Rule 255.2(b).   

Binding Effect of Tax Court’s Decision

Rule 255.7 provides that any decision that the Tax Court enters in a partnership action under BBA is binding on the partnership and all of its partners.  The term “partner” is not defined under New Title XXIV.A.  However, under Rule 240 “partner” is defined for purposes of a TEFRA action to mean “a person who was a partner as defined in Code section 6231(a)(2)” at any time during the taxable year before the Court.  Section 6231(a)(2), prior to amendment by the BBA, defined partner for TEFRA purposes to mean a partner in the partnership and “any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.” 

Unlike TEFRA, the BBA does not define the term “partner”.  However, the BBA does define a partnership-related item broadly to include items or amounts “relevant in determining the tax liability of any person” under chapter 1 (emphasis added).  See section 6241(2)(B)(i).  In addition, the Joint Committee on Taxation explanation accompanying TTCA explicitly states that the scope of BBA is not narrower than TEFRA, “but rather, [is] intended to have a scope sufficient to address those items described as partnership items, affected items, and computational items in the TEFRA context…, as well as any other items meeting the statutory definition of a partnership-related item.” See Technical Explanation of the Revenue Provisions of the House Amendment to the Senate Amendment to H.R. 1625 (Rules Committee Print 115-66), p.37, JCX-6-19 (March 22, 2018). 

Consistent with the broad scope of partnership-related item under BBA, when describing the binding nature of final decisions in proceedings under the BBA, Treas. Reg. §301.6223-2(a) provides that such decisions are binding on the partnership, its partners, and “any other person whose tax liability is determined in whole or in part by taking into account directly or indirectly adjustments determined under the [BBA]”.   Whether the Tax Court follows this regulation in extending the binding effect of its own decisions in BBA partnership actions remains to be seen.