IRS Issues Procedures for Electing to Apply New Partnership Audit Regime

(Parker Tax Publishing August 2016)

The IRS has issued temporary regulations regarding the election to apply the new partnership audit regime, enacted by the Bipartisan Budget Act of 2015, to partnership returns filed before the effective date of the new law. The regulations provide the time, form, and manner for making the election and generally affect any partnership that wishes to elect to have the new partnership audit regime apply to its returns filed for tax years beginning before January 1, 2018. T.D. 9780 (8/5/16).

Background

Enacted in November 2015, the Bipartisan Budget Act (BBA) (Pub. L. 114-74) repealed the voluntary centralized audit procedures for electing large partnerships, as well as the TEFRA procedures (i.e., rules adopted as part of the Tax Equity and Fiscal Responsibility Act of 1982), and replaced them with a single centralized audit system. Under the new system, the IRS will examine a partnership's items of income, gain, loss, deduction, credit and partners' distributive shares for a particular year of the partnership (i.e., the "reviewed year"). Any adjustments are taken into account by the partnership, and not the individual partners, in the year that the audit or any judicial review is completed (i.e., the "adjustment year"). Partners would not be subject to joint and several liability for any liability determined at the partnership level.

Observation: Under the new rules, distinctions among partnership items, non-partnership items, and affected items no longer exist.

A partnership may elect out of the new system (and it and its partners would be governed by the prior rules) for a partnership tax year if it meets certain eligibility requirements. One of the eligibility requirements is that, for the tax year, the partnership is required to furnish 100 or less Schedules K-1 with respect to its partners. Another eligibility requirement is that each of the partners must be an individual, a deceased partner's estate, a C corporation, a foreign entity that would be required to be treated as a C corporation if it were a domestic entity, or an S corporation (provided special rules are met).

The new partnership audit provisions generally apply to returns filed for partnership tax years beginning after December 31, 2017. However, a partnership may elect to apply the new partnership audit rules to any return of the partnership filed for partnership tax years beginning after November 2, 2015, and before January 1, 2018.

The IRS has issued temporary regulations under Reg. Sec. 301.9100-22T that provide the time, form, and manner for a partnership to make such an early election to apply the new partnership audit regime.

Procedures for Electing to Apply New Audit Regime

Under the general rule in Reg. Sec. 301.9100-22T(b), an election to have the new partnership audit regime apply must be made when the IRS first notifies the partnership in writing that a partnership return for an eligible tax year (i.e., any partnership tax year beginning after November 2, 2015 and before January 1, 2018) has been selected for examination (a "notice of selection for examination"). A partnership that wishes to make an election must do so within 30 days of the date of this notification. A partnership that has not received a notice of selection for examination may still make an election with respect to a partnership return for an eligible tax year for purposes of filing an administrative adjustment request (AAR) under Code Sec. 6227.

Reg. Sec. 301.9100-22T(b)(2) provides that the election must be in writing and include a statement that the partnership is electing to have the partnership audit regime enacted by the BBA apply to the partnership return identified in the IRS notification of selection for examination. The statement must be dated and signed by the tax matters partner, or an individual who has the authority to sign the partnership return for the tax year under examination. The statement must include the name, taxpayer identification number, address, and telephone number of the individual who signs the statement, as well as the partnership's name, taxpayer identification number, and tax year to which the statement applies. In addition, the statement must include representations that the partnership is not insolvent, is not currently subject to a bankruptcy petition, and has sufficient assets to pay any potential underpayment that may be determined during the partnership examination.

A partnership electing into the new partnership audit regime under the BBA will also be required to designate a partnership representative, and provide the partnership representative's name, taxpayer identification number, address and daytime telephone number, and any other information as required by future guidance regarding the partnership representative.

Partnerships electing to apply the new audit regime cannot elect out of the new rules under the small partnership exception with respect to that return.

An election under the temporary regulations is not available if the partnership has already applied the TEFRA partnership procedures with respect to the partnership return for that tax year. Similarly, an election under the temporary regulations also is not available if a partnership that is not subject to the TEFRA partnership procedures has filed an amended return of partnership income for the partnership tax year.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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