United States

IRS reproposes partnership audit regime implementing regulations

TAX ALERT  | 

The IRS released updated proposed regulations this week implementing the centralized partnership audit regime (also known as the “BBA rules”). The proposed regulations withdraw and re-propose certain portions of the previously proposed regulations to conform with the technical corrections and clarifications made by the Technical Corrections Act of 2018, enacted in March 2018 (prior coverage: Spending legislation clarifies and modifies partnership audit rules), which also making several changes unrelated to the Technical Corrections Act. We would like to highlight some of the more significant revisions made as part of the re-proposed regulations.

Among the updates is a significant clarification to the scope of the BBA rules. While conforming to the Technical Corrections Act’s definition of “partnership-related items” in defining what items are in scope of the new rules, the updated proposed regulations retain the old regulations’ inclusion of “items and amounts that relate to any transaction or liability of the partnership”. However, the newly proposed regulations limit the reach of this inclusion to some transactions under section 707 (but not transactions under section 707(a)(1)), transactions between the partnership and a partner acting in its capacity as partner, and transactions between the partnership and an indirect partner acting in its capacity as indirect partner. For a revised list of partnership-related items see proposed regulations section 301.6241-6.

The updated proposed regulations also expand the list of permitted modifications that a partnership may utilize to reduce the amount of an imputed underpayment the partnership would pay under the entity-level tax of section 6225. Added to the list are modifications related to income tax treaties with the United States. A partnership representative may request modification to an imputed underpayment by providing information that a partnership or partner would qualify for a reduction or exemption from tax under such a treaty.

Additionally, the proposed regulations change the procedure on how a partner may raise a partner-level reasonable cause defense against penalties or additions to tax. Removed are provisions allowing partners to raise their defenses under the modification procedures pertaining to amended returns and partner closing agreements. Instead, the proposed regulations reconfirm that partners must pay all unpaid penalties and additional tax, and then claim a refund of the penalty under procedures existing outside of the BBA rules.

Lastly, we would like to highlight the revised methodology used in determining partner-level taxes and interest owed by partners if a push-out election is made by the partnership, again to conform with the Technical Corrections Act. The proposed regulations provide that decreases, as well as increases, in tax that result from taking into account partnership adjustments through push-out are allowable. However, no corresponding provisions exist that allow a corresponding offset for purposes of calculating interest. The result is that partners are on the hook for paying interest (increased over the usual underpayment rate by 2 percent) on push-out related tax increase, but receive no offsetting interest reduction for push-out related tax decreases.

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