In Notice 2016-23 the IRS has asked for comments on the new partnership audit regime imposed by the Bipartisan Budget Act of 2015. The new regime replaces the TEFRA partnership audit regime with one that not only unifies the examination of the income, expense and credit items of the partnership at the partnership level (rather than requiring an examination of each partner) as was true of the TEFRA regime, but also defaults to computing and collecting a tax assessment at the partnership (rather than individual partner) level as part of the exam.
The system is mandated for tax years beginning on or after January 1, 2018, but taxpayers may elect to use the system for tax years beginning November 2, 2017.
Like the older TEFRA system, the new program allows an exemption for qualifying small partnerships that have no “disqualifying entity type” partners. But unlike the old system, this time the qualifying partnerships must “opt-out” of the system.
The law contains a list of allowed partners for a small partnership, but this list did not contain some types of entities that often are partners in small partnerships (such as credit shelter trusts, retirement plans, other partnerships, etc.). Congress did, however, give the IRS the right to expand that list and in the request for comments the IRS is indicating they are considering doing just that.
The IRS request for guidance here states the agency is specifically looking for comments on:
The election out of the new centralized partnership audit regime under section 6221(b) for partnerships that are required to furnish 100 or fewer Schedules K-1, including whether any type of partner, other than those types of partners specifically identified in section 6221(b)(1)(C), should be treated under rules similar to the special rules applicable to S corporations.
The IRS’s request also indicates that the agency is considering issues that may arise from the types of income and expense adjusted and how that would enter into a tax computation for the partnership. Guidance is requested on:
The determination of the imputed underpayment under section 6225, including:
a. How the netting calculation under section 6225(b)(1) should work; and
b. How character changes, restrictions, and limitations under the Code are taken into account.
The guidance also asks for specific comments on how to deal with the following mechanical problems that will arise when computing the tax to be paid at the partnership level at the end of the exam (the “imputed underpayment”):
(4) Modification of the imputed underpayment under section 6225(c), including:
a. The mechanics and timing for requesting modification and documentation to be provided to support the request for modification;
b. Implementation of the modification, with respect to publicly-traded partnerships, for certain specified passive losses under section 469;
c. The effect of unrelated business taxable income of a tax-exempt entity on the modification procedure relating to tax-exempt partners; and
d. Any other issues and factors that should be considered when formulating the modification procedures.
(5) How an adjustment made by the IRS under section 6225 that does not result in an imputed underpayment should be taken into account by the partnership.
A partnership has the option to push an adjustment down to the individual partners instead of paying the adjustment at the partnership level, after calculating the appropriate adjustment to each partner. The partners will report this adjustment in the year in which the exam concludes, not the year that was actually under exam.
The IRS is looking for guidance on the following issues for the partnership’s election to push the adjustment down to the partners:
The election to use the alternative to payment of the imputed underpayment by the partnership under section 6226, including:
a. How to make the election, the time for providing information to the IRS, the information that should be required to be included with the election, and the form and content of the statement of adjustments to be provided to the partners and the IRS;
b. When the statements should be filed with the IRS and furnished to partners;
c. How the adjustments in the final notice of partnership adjustment should be reflected if the adjustments are changed as a result of a court proceeding;
d. Generally, how tax attributes should be taken into account for intervening years between the reviewed year and the adjustment years;
e. How adjustments are taken into account by partners under the alternative to payment of the imputed underpayment by the partnership under section 6226; and
f. The consequences that result when a partner fails to account for adjustments as required under section 6226(b), including how tax attributable to those adjustments is assessed and collected.
The IRS also asks for guidance on how revisions to prior year returns, generating an administrative adjustment request under new §6227, will be made and how they should be handled by the IRS.
The IRS also is asking for guidance on an issue that is not addressed at all in the new law, but which will need to be resolved—how do adjustments under this regime affect the basis of partners in their interests in the partnership and the basis of assets in the hands of the partnership. Similarly, the IRS is asking how to handle the situation where the partnership has filed for bankruptcy or simply ceases to exist.
The IRS indicates that, due to the election option for returns (including some being filed for short 2015 tax years that began after November 2, 2015), the deadline for comments is April 15, 2016. The address to send comments to or to hand deliver comments to can be found in the notice. As well, comments may be emailed to Notice.Comments@irscounsel.treas.gov (with the request that the subject line contain “Notice 2016-23”).
In the March 7, 2016 edition of Tax Notes Today, Drita Tonuzi, IRS associate chief counsel (procedure and administration) was quoted as stating at the Federal Bar Association Meeting in Washington, DC that the IRS did not ask for comments on the early election option because specific guidance on that election will be released “soon” (presumably before the April 15 comment deadline).