IRS issues regulations for opting-in to new partnership audit rules
TAX ALERT |
The Bipartisan Budget Act (BBA) enacted on Nov. 2, 2015, Public Law 114-74 (the BBA) repealed the current rules governing partnership audits and replaced them with new audit regime that allows for the assessment and collection of tax at the partnership level. (See our Dec. 18, 2015, article, Understanding the new partnership audit rules.) Although these rules are generally applicable to taxable years beginning after Dec. 31, 2017, the law allows for partnerships to elect into the new audit regime for the returns filed for a partnership taxable year beginning after Nov. 2, 2015, and before Jan. 1, 2018. To implement the new partnership audit regime, the Department of Treasury and the IRS have issued the proposed regulations pursuant to section 1101(g)(4) of the BBA that provide rules for the time, form and manner for making a valid election to apply the new partnership audit regime.
The proposed regulations are also temporary regulations and are effective as of Aug. 5, 2016. These temporary regulations amend the Procedure and Administration Regulations section 301.9100-22T.
Under the proposed regulations, a partnership will not need to decide whether or not to elect into the new partnership audit regime when it files its tax return for the year in question. Instead, a partnership that has been selected for examination for an eligible year has 30 days after it is notified of selection to submit a written statement electing into the new partnership audit regime.
A written request for an election must have a clear statement that a partnership is making an ‘Election under section 1104(g)(4)’ of the BBA. This statement must be signed by either the tax matters partner (as determined under the existing partnership rules) or any other individual authorized to sign the partnership return for the year under examination. The statement must include the name, taxpayer identification number, address and telephone number of the individual who signs the statement, as well as the partnerhsip’s name, taxpayer identification number and tax year to which the statement applies. The partnership must also represent that it is not insolvent, is not subject to a bankruptcy proceeding, and has sufficient assets to pay any potential entity-level tax (and that these conditions are reasonably expected to continue). Such statement must be signed under penalties of perjury, include language that the individual signing the statement is duly authorized to make an election and that statement is true, correct and complete to the best of the individual’s knowledge.
The proposed regulations also state that a partnership electing into the new partnership audit regime under the BBA will also be required to designate a partnership representative. A partnership representative is a person the IRS will be able to contact throughout the audit process. The Treasury Department and the IRS will be issuing additional guidance as to who will be eligible to be a partnership representative.
After receipt of the request for an election, the IRS will issue a notice of administrative proceeding to the partnership and its designated representative, formally initiating the examination under the new partnership audit regime. However, this notice will not be mailed until 30 days after receipt of the request for an election, giving the partnership time to file an administrative adjustment request (AAR, the partnership counterpart to an amended return), if necessary.
The regulations also provide that partnerships may elect into the new partnership audit regime under the BBA, even if not selected for examination. Such partnerships make an election if they wish to file an AAR under section 6227 as amended by the BBA. This election may not be made until Jan. 1, 2018, and may only be made for taxable years beginning after Nov. 2, 2015. An election into the BBA regime for purposes of filing an AAR subjects the partnership to the entirety of the BBA regime, not just the portions relating to the AARs.
These regulations are merely the first of what is expected to be a series of regulatory actions implementing the new partnership audit regime under the BBA, and many of the practicalities of the regime will depend on these forthcoming regulations. Although most partnerships will not be eligibile to opt-in until 2017 (for their 2016 calendar year tax returns), some eligible returns have already been filed (new calendar year partnerships beginning after Nov. 2, 2015, for example). Partnerships and their advisors should carefully consider the current uncertainties surrounding the new partnership audit regime under the BBA before making a decision to elect into it.