The IRS has published final regulations implementing the centralized partnership audit regime enacted as part of the Bipartisan Budget Act (BBA) of 2015.
These final regulations have not yet been published in the Federal Register due to the ongoing government shutdown. Once officially issued, however, the final regulations will govern IRS audits of partnerships for taxable years beginning after Dec. 31, 2017, and ending after Aug. 12, 2018, as well as partnerships that make the election to apply the BBA partnership audit regime early.
The recently finalized regulations represent the latest in a series of regulatory actions undertaken by the IIRS to implement the new BBA centralized partnership audit regime. Treasury and the IRS previously released final regulations governing elections to opt of the BBA centralized partnership audit procedures (TD 9829) and partnership representatives (TD 9839).
The newly published final regulations generally follow proposed regulations (REG–136118-15) that were re-issued in August 2018. The August 2018 proposed regulations withdrew numerous other previously proposed regulations.
The most recently published final regulations cover a variety of topics including:
- The scope of the BBA centralized partnership audit rules
- Consistent treatment with the partnership return of partnership items by partners
- Partnership adjustments made by the IRS and the determination of the amount of a partnership’s liability
- Elections to push-out partnership adjustments to partners
- Procedures for obtaining modifications to imputed underpayments, including Administrative Adjustment Requests
- Notices of proceedings and adjustments
- Assessment, collection, and payment of imputed underpayments
- Interest and penalties on imputed underpayments
- Judicial review of partnership adjustments
- Definitions and special rules
The final regulations clearly reflect that the changes to the audit rules under BBA were meant as a whole to shift many of the burdens associated with a tax audit of a partnerships from the IRS to the partnership and its partners. For instance, under the BBA audit rules, the IRS is free to make an adjustment at the partnership level without having to determine the proper amount of tax resulting from the adjustment at the partner level. Rather, the burden of ensuring that the tax resulting from the adjustment takes into account the facts and circumstances of the individual partners shifts to the partnership. Accordingly, the final regulations also include rules for a partnership to request a modification of an imputed underpayment, or to push an adjustment out its partners.
The IRS also paired the proposed regulations with a Notice providing provides guidance on special enforcement matters under Section 6241(11). The notice indicates that the IRS intends to issue regulations that provide that the BBA does not apply to certain items for situations in which the IRS determines necessary for the effective and efficient enforcement of the Code. This includes certain situations in which an adjustment during an examination of a person other than the partnership requires a change to a partnership-related item, as well as situations in which a qualified subchapter S subsidiary (a so-called QSub) is a partner in the partnership. Specifically, the regulations will provide that a QSub is to be treated similarly to an S corporation for purposes of the election-out of the BBA under Section 6221(b).
Although the centralized partnership audit rules of the BBA apply to partnership taxable years beginning after Dec. 31, 2017, there remain areas of uncertainty. The IRS has indicated that it will still consider comments regarding certain international and tax-exempt aspects of the BBA rules. The IRS has also indicated that comments on rules regarding the impact of partnership level adjustments on tax basis and tax attributes will be addressed in further guidance.
Grant Thornton Insight: Partnerships and investors in partnerships should consider their obligations and options under the BBA, including the designation of a PR, the ability for eligible partnerships to elect out of the regime, and any necessary amendments to the partnership agreement to account for the provisions of the BBA.
Senior Manager, Washington National Tax Office
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