United States

Proposed IRS partnership audit regulations allow tiered push-out


On December 19, the IRS is scheduled to publish proposed regulations REG-120232-17 and REG-120233-17, applicable to the centralized partnership audit rules that were enacted in 2015 and will take effect for audits of 2018 and later years. Although the audits themselves may not begin until 2019 or 2020, partnerships that must plan for that eventuality will likely welcome the added certainty provided by these releases.

The highlight of the new release is the announcement that tiered partnerships will be permitted to use the “push-out” method – in which a partnership is relieved of entity-level tax as long as it transmits revised K-1 statements to its partners, including other partnerships that will similarly be allowed to “push-out” liability to their partners, and so forth until the ultimate taxpayers, mostly individuals or corporations, are issued a revised K-1 statement that will allow them to calculate the amount of added tax they may have to pay. The release also includes related changes to the procedures governing administrative adjustment requests and rules applicable to judicial review of proposed IRS audit adjustments to partnership items.

Much controversy surrounded the issue of whether tiered push-outs would be permitted for tiered arrangements. The original legislation was silent on the issue, which some argued implied a negative view on the part of Congress, while others argued that the silence was a technical drafting error. The latter view was supported when a technical corrections bill was introduced during 2016 to clarify the point, but no action was taken on that legislation and the bill was not even reintroduced in 2017. The IRS reportedly disliked the method and the initial proposed regulations reserved on the issue. After a public hearing and many formal and informal comments from the public, the Treasury finally decided that the original legislation should be interpreted so as to permit the push-out method for tiered partnerships, even without final action on the proposed technical corrections. The new rules also deal with situations where an S corporation or trust – rather than another partnership – is a partner in a tiered arrangement.

Most importantly, the new rules provide that the push-out of adjustments through the tiers of a tiered arrangement must be fully completed, in some cases, within nine and one-half months of the end of the audit. For example, if the audited partnership’s audit was completed for a calendar year taxpayer on Dec. 31, 2020, the push-out process would need to be fully completed throughout the tiers by Sept. 15, 2021. There is evidently no procedure for obtaining an extension, even if an upper-tier partnership has not received its adjusted K-1’s in a timely manner. This may require upper tier partnerships to ensure that private contractual arrangements are in place to ensure that they are not left “holding the bag” with an adjusted K-1 issued to them – say, on Sep. 10, 2021 using the above example – with insufficient time for them to push-out to the next tier and avoid the entity level tax. 

Thus, every taxpayer that invests in a partnership that invests in other partnerships must carefully review the applicable agreements and may have to reach new understandings regarding procedures to be followed if a lower-tier partnership is audited. This adds to the other issues that may require modifications to existing partnership agreements to deal with the new rules, such as partnership agreement provisions governing who will be authorized to concede partnership issues to the IRS, who will be required to pay for the costs of challenging IRS positions if the partnership does not concede to a proposed adjustment, and whether the partnership will pay an entity level tax or “push-out” the liability to its partners. 

For more background on the proposed partnership audit regime regulations, see our prior alerts: Proposed partnership audit regulations released by the IRS; and IRS issues proposed regulations for new partnership audit procedures.


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