United States: Temporary Regulations Allow For Early Opt-In To New Partnership Audit Regime

Treasury and the IRS on Aug. 4 issued highly anticipated temporary and proposed regulations that allow certain partnerships to elect into the new partnership audit regime upon an examination, which would allow the partnership to pay any imputed underpayment of tax on behalf of its partners.

T.D. 9780 provides temporary regulations under new Treas. Reg. Sec. 301.9100-22T, and the government also issued proposed regulations (REG-105005-16) that mirror the temporary regulations.

Partnership audit rule changes

The Bipartisan Budget Act of 2015 (BBA), becomes effective for partnership tax years beginning after Dec. 31, 2017, and creates an audit and tax collection regime that as a default, requires a partnership to pay any imputed underpayment of tax on behalf of its partners. This is a dramatic change from current law, where under the audit rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), partnership audit adjustments are required to be passed through to the partners themselves. The BBA does allow, as an alternative to the default rule, the partnership to "push out" underpayment liabilities to its partners, and have the partners pay any tax due. However, this alternative rule comes with an increased interest rate.

The BBA allowed for an early-election into the new partnership audit rules. The temporary regulations address the eligibility and process of making that early election.

Years affected

The temporary regulations apply to any partnership returns filed for a partnership taxable year beginning after Nov. 2, 2015, and before Jan. 1, 2018. So the earliest a calendar year partnership would be able to early elect to apply the BBA rules would be for its 2016 taxable year.

Intersection with TEFRA

The election into the BBA under the temporary regulations doesn't apply if the partnership has taken the affirmative step to apply the TEFRA partnership procedures related to the partnership return for that taxable year. The regulations explain that this occurs when the tax matters partner (TMP) of the partnership has filed an administrative adjustment request (AAR) under TEFRA. Similarly, the temporary regulations don't apply if a partnership that isn't subject to TEFRA has filed an amended return for that taxable year.

Timeline and procedure

The election for the BBA to apply early must be made when the IRS issues the "notice of selection of examination," which is the first notification by the IRS that a partnership return is under audit. Within 30 days of the date of this notice, the partnership must make the election.

An exception to the general rule applies whereby a partnership that hasn't received a notice of selection of examination may make the election to have the BBA apply if the partnership wishes to file an AAR under Section 6227, as amended by the BBA. In no case, however, may an election be made under this exception earlier than Jan.1, 2018. The preamble to the regulations provides that the government intends to issue guidance regarding AARs under Section 6227 as amended by the BBA before Jan. 1, 2018.

Making the election

The election must be in writing and include a statement that the partnership is electing to have the partnership audit regime enacted by the BBA apply to the partnership return identified in the IRS notice of selection for examination. The partnership must write "Election under Section 1101(g)(4)" at the top of the statement.

The statement must include other information as specified in the regulations, such as identification information of the partnership and the following representations:

  • The partnership is not insolvent and does not reasonably anticipate becoming insolvent.
  • The partnership is not currently and does not reasonably anticipate becoming subject to bankruptcy under Title 11.
  • The partnership has sufficient assets and reasonably anticipates having sufficient assets to pay the potential imputed underpayment that may be determined during the exam. The statement must be signed under penalties of perjury. The partnership must also identify and designate a partnership representative under new Section 6223 and provide certain information regarding the partnership representative.

Once a partnership elects into the BBA early, it may not elect out of the new rules under the small partnership exception under new Section 6221(b). The regulations further provide that an election that isn't made in accordance with the regulations is invalid, and once the election is made, it may be revoked only with the consent of the IRS. An election may also not be valid if it "frustrates the purposes" of the BBA, which include the collection of any imputed underpayment. A partnership may also not request an extension of time for making the election by applying for relief under Treas. Reg. Sec. 301.9100-3 (commonly referred to as "9100 relief").

Future guidance is critical

The regulations do not address substantive issues regarding the application of the new rules under the BBA and its interaction with Subchapter K, and there are a number of unanswered questions regarding application.

Additional guidance by the government regarding these unanswered questions will be critical for partnerships to determine whether they should early elect to apply the new rules in the BBA. For more information on the BBA regime, read Tax Insights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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