Treasury and IRS re-propose broader partnership audit rules

Tax Hot Topics newsletterTreasury and the IRS on Aug. 13 issued re-proposed regulations under the centralized partnership audit rules of the Bipartisan Budget Act of 2015 (BBA).

The new proposed regulations (REG-136118-15) take into account the statutory changes made by Congress under the Technical Corrections Act of 2018 (TTCA), which was enacted in March 2018, and replace the original, proposed regulations released in June 2017.  The new proposed regulations withdraw numerous other, previously proposed regulations, including:

  • REG-119337-17 from November 2017 (related to international provisions, including withholding on foreign partners)
  • REG-120232-17 and REG-120233-17 from December 2017 (related to administrative and procedural rules impacting assessment and collection, penalties and interest, and periods of limitation)
  • REG-118067-17 from February 2018 (related to adjusting tax attributes)

The new proposed regulations do not impact regulations under the BBA that have been finalized, which are T.D. 9829, relating to the election out of the BBA; and T.D. 9839, related to partnership representatives (PRs) and the early election into the BBA.  

Expanded scope The new proposed regulations reflect the statutory changes of the TTCA, which, among other things, modify the general rule under Section 6221 to reflect that “any adjustment to a partnership-related item” shall be determined at the partnership level, unless otherwise indicated. This is a change from the statute as originally drafted under the BBA, which impacted adjustments to items of “income, gain deduction, or credit of a partnership for a partnership taxable year (and any partner’s distributive share thereof).”

The preamble to the proposed regulations indicates that the change by the TTCA was intended to clarify that the scope of the BBA is not narrower than the scope of its predecessor audit regime, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The TTCA also included a broad definition of the term partnership-related item, to include items or amounts with respect to the partnership that are relevant in determining the tax liability of any person, which includes items that may not appear on the partnership’s tax return.

The new proposed regulations state that “item[s] or amounts with respect to the partnership” may be, among other things: 

  • Shown or reflected, or required to be shown or reflected on the partnership’s tax return
  • In the partnership’s books and records
  • An imputed underpayment
  • Relating to a transaction with the partnership by a partner acting in its capacity, or by an indirect partner acting in its capacity as an indirect partner
  • Relating to basis in the partnership
  • Legal or factual determinations necessary to make an adjustment

Determination of imputed underpayment and rule for payment The new proposed regulations address changes to the statute under the TTCA regarding the determination of an imputed underpayment by the IRS under Section 6225 with respect to the reviewed year of the partnership, including provisions related to modifications of imputed underpayments. The amendments made generally seek to clarify the law, and accordingly, several of the newly proposed regulations reorganize the previously issued proposed regulations, while addressing the change in law by the TTCA.

This includes regulations on the netting of adjustments within groupings and subgroupings, as well as adjustments that do not result in imputed underpayments of tax. The new proposed regulations also address the issue of modifications for partners that are entitled to the benefits of an income tax treaty.

Another provision modified by the TTCA was Section 6226, which offers a partnership the ability to “push-out” an imputed underpayment to its partners.  This section was modified by providing, among other things, (1) clarification of the effect of the election itself, (2) adjustments to the partner’s income tax liability, and (3) the effect of a pass-through partner receiving a statement by the partnership under examination.

Next steps The centralized partnership audit rules of the BBA apply to partnership taxable years beginning after Dec. 31, 2017. Comments on the new proposed regulations are due Oct. 1, with a public hearing scheduled for Oct. 9. Treasury and the IRS still hope to finalize the entire package by the end of the year. Although the new proposed regulations are useful for partnership planning purposes in determining, e.g., whether a partnership should pay any imputed underpayment under the default rules of Section 6225, or alternatively, elect to “push-out” an imputed underpayment under Section 6226, the bulk of the procedural rules contained in the new proposed regulations will have an impact only in the course of an examination by the IRS.

In addition, as has been expressed in the new proposed regulations, as well as in previously promulgated final regulations, the implementation of the BBA audit rules will be a learning process for both taxpayers and the government. Officials from the IRS and Treasury have stated publicly that additional guidance, in the form of notices, revenue procedures or the Internal Revenue Manual, will likely be required at some point in the future.  

For now, partnerships, as well as investors in partnerships, should consider their obligations and options under the BBA in the near term, including the designation of a PR, determining the ability for eligible partnerships to elect out of the centralized partnership audit rules of the BBA, and any necessary amendments to the partnership agreement to account for the provisions of the BBA. For some calendar year partnerships with short taxable years ending in 2018, those decisions may need to be made sooner rather than later, and without updated forms or schedules by the IRS.

Dave Auclair
National Managing Principal
Washington National Tax Office
T +1 202 521 1515

Liz Askey
Managing Director
Washington National Tax Office
T +1 202 521 1513

Grace Kim
Principal, Partnerships
Washington National Tax Office 
T +1 202 521 1590

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office 
T +1 202 521 1552

Shamik Trivedi
Senior Manager
Washington National Tax Office
T +1 202 521 1511

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