IRS Releases Proposed Partnership Audit Regulations to Federal Register

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The IRS released the highly-anticipated proposed regulations for the new partnership audit regime on June 13, 2017.  The proposed regulations were released to, but not published in, the Federal Register earlier this year. Congress passed the new rules as part of the Bipartisan Budget Act of 2015 (“BBA”) to repeal and replace the prior unified partnership audit rules under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).  Much was left open to Treasury interpretation. The proposed regulations implement the partnership provisions of the BBA that, at least in the default regime, impose an entity-level tax on partnerships.

As discussed in a prior post, the proposed regulations address the scope of the BBA centralized partnership audit regime and provide rules for electing out of the new regime, filing administrative adjustment requests, and determining the amounts owed by the partnership or its partners after an examination. The rules also address the role of the partnership representative (the replacement for the Tax Matters Partner under TEFRA) and provide other definitions. The IRS’s summary to the proposed regulations makes it clear that the centralized regime is broad in scope.  The BBA rules are intended to “increase the ability of the IRS to audit large partnerships” and “increase the number of partnership audits” for both partnerships subject to the new rules and those that opt-out.  To streamline the partnership audit process, the IRS has shifted much of the administrative burden of TEFRA to taxpayers.

Key features addressed in the proposed regulations include the following:

  • Limiting the number of partnerships that can elect out of the centralized regime.
    • The regime requires partnerships to take affirmative action to elect out
      to “increase[] the likelihood that a partnership will be subject to the more streamlined…procedures of the centralized partnership audit regime.”
    • To opt-out of the centralized regime, all partners must be “eligible partners.” Practitioners suggested that the IRS exercise its authority granted by the statute to allow certain entities to be “eligible partners” (e.g., disregarded entities, trusts, partnerships, etc.). The proposed regulations decline to expand “eligible partner” entities. As a result, partnerships, trusts, disregarded entities, nominees, other similar persons that hold an interest on behalf of another, and estates that are not of a deceased partner are not “eligible partners” per proposed section 301.6221(b)-1(b)(3)(ii).
    • The IRS stated its intent to use judicial doctrines to ensure that those who opt-out of the new regime are not inappropriately trying to avoid the new rules.
  • Extensions of time to avoid the “imputed underpayment” default rule (i.e., collected from the partnership) are at the discretion of the IRS.
    •  The proposed regulations clarify that to modify the imputed underpayment under Section 6225(c) the submission must be made within 270 days after the proposed adjustment, unless that period is “extended with the consent of the Secretary.”
  • The IRS may designate a partnership representative if none is selected by the partnership.
    • The IRS may designate any person as the partnership representative. The IRS will consider whether the person is a partner in the partnership along with other factors listed in proposed section 301.6223-1(f)(5)(ii) (e.g., the view of the partners having a majority in interest, the general knowledge of the person in tax matters, the person’s access to records of the partnership, and whether the person is a U.S. person).
    • Once the IRS has made a partnership representative designation, the partnership may not revoke that designation without the consent of the IRS.
    • The “broad authority” of the partnership representative may not be limited by “state law, partnership agreement, or any other document or agreement.” Any action taken by the representative is valid and binding on the partnership for tax purposes regardless of any other provision of state law or agreement.
  • The push-out method can be elected on an adjustment-by-adjustment basis.
    • The proposed regulations state that the push-out election must be made within 45 days of the final partnership adjustment (“FPA”), and must specify which adjustments the partnership is electing to push out. Thus, if the FPA includes a general imputed underpayment and one or more specific imputed underpayments, the partnership may make an election with respect to any or all the imputed underpayments.
    • The proposed regulations decline to address the concern that a pass-through partner who receives a revised K-1 under the push-out method should be able to flow through the adjustments to its owners instead of paying tax on the adjustments at the first tier. The preamble states that the regulations reserve on this issue, but points to the Tax Technical Corrections Act of 2016 (not enacted) that would have addressed this issue.

The above are just some of the key features of the new proposed regulations. Future posts will go through the various provisions of the proposed regulations and highlight the remaining issues to be addressed by the IRS or Congress and the impact on taxpayers. Public comments on the proposed regulations are due August 14, 2017, with a public hearing scheduled for September 18, 2017.

 

JW Law PLLC works with partnerships and LLCs to address the complexities of the partnership audit rules under TEFRA and the BBA. We have also represented numerous partnerships and LLCs in tax controversies. If you would like to discuss how these partnership audit changes will impact you or your clients, please contact:

Joshua Wu

jwu@jwlawdc.com

 

Disclaimer

This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose.

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