In Notice 2019-6 the IRS announced its intention to issue proposed regulations to deal with “special enforcement matters” under the centralized partnership audit regime (CPAR). Special enforcement matters are defined at IRC §6241(11), a provision added by the Consolidated Appropriations Act of 2018 as part of the technical corrections to the CPAR partnership audit regime that was created by the Bipartisan Budget Act of 2015 and which will first be effective for partnership tax years beginning in 2018.
IRC §6241(11) provides:
(11) Treatment of special enforcement matters. --
(A) In general. -- In the case of partnership-related items which involve special enforcement matters, the Secretary may prescribe regulations pursuant to which --
(i) this subchapter (or any portion thereof) does not apply to such items, and
(ii) such items are subject to such special rules (including rules related to assessment and collection) as the Secretary determines to be necessary for the effective and efficient enforcement of this title.
(B) Special enforcement matters. -- For purposes of subparagraph (A), the term "special enforcement matters" means --
(i) failure to comply with the requirements of section 6226(b)(4)(A)(ii),
(ii) assessments under section 6851 (relating to termination assessments of income tax) or section 6861 (relating to jeopardy assessments of income, estate, gift, and certain excise taxes),
(iii) criminal investigations,
(iv) indirect methods of proof of income,
(v) foreign partners or partnerships, and
(vi) other matters that the Secretary determines by regulation present special enforcement considerations.
The IRS has announced its intention to issue regulations that deal with two matters under this provision. In these cases, the CPAR regime will not apply to these items and regulations will provide special rules to deal with these issues
The first case involves situations where the examination of a person other than the partnership requires an adjustment to a partnership item. As the Notice explains:
Specifically, the regulations will allow the IRS to effectively and efficiently focus on a single partner or a small group of partners with respect to a limited set of partnership-related items without unduly burdening the partnership and avoiding procedural concerns about the appropriate level at which such items must be examined. Consequently, the regulations will provide that the IRS may determine that the centralized partnership audit regime does not apply to adjustments to partnership-related items when the following conditions are met:
(1) The examination being conducted is of a person other than the partnership;
(2) A partnership-related item must be adjusted, or a determination regarding a partnership-related item must be made, as part of an adjustment to a non-partnership-related item of the person whose return is being examined; and
(3) The treatment of the partnership-related item on the return of the partnership under section 6031(b) or in the partnership's books and records was based in whole or in part on information provided by, or under the control of, the person whose return is being examined.
The other area mentioned in the Notice involves situations where a QSUB is a partner in a partnership. The IRS argues that special rules are needed in this case for the following reasons:
The regulations will provide that this situation presents special enforcement considerations because partnership structures with QSubs as partners could have far more than 100 ultimate partners, including many thousands, and still potentially elect out of the centralized partnership audit regime. Allowing such a large partnership to elect out of the centralized partnership audit regime would give rise to significant enforcement concerns for the IRS and frustrate the efficiencies introduced by the centralized partnership regime.
Thus, the Notice continues:
As a result, the regulations will provide that section 6221(b) generally does not apply to a partnership with a QSub as a partner. The regulations will also provide, however, that if a partnership meets certain requirements as set forth in the regulations, the partnership may make an election under section 6221(b). Specifically, the regulations will apply a rule similar to the rules for S corporations under section 6221(b)(2)(A). The regulations will also provide that for purposes of determining whether a partnership has 100 or fewer partners for the taxable year for purposes of the election under section 6221(b), the partnership must include (1) the statement the partnership is required to furnish to the QSub partner under section 6031(b) and (2) each statement the S corporation that holds 100 percent of the stock of the QSub partner is required to furnish to its shareholders under section 6037(b).
The Notice provides the following information about the expected timing of the release of the regulations:
The Treasury Department and the IRS intend to issue proposed and final regulations prior to eighteen months after enactment of the TTCA such that the intended regulations described in this section of the Notice may be applicable to all partnership taxable years beginning after December 31, 2017. Section 7805(b)(2). If final regulations are not issued prior to eighteen months after enactment of the TTCA, the Treasury Department and the IRS intend the regulations to be applicable to partnership taxable years beginning after December 31, 2017 and ending after the date this Notice is issued to the public. Section 7805(b)(1)(C).