TD 9844, 12/21/2018; Reg § 301.6221(a)-1; Reg § 301.6222-1; Reg § 301.6225-1; Reg § 301.6225-2; Reg § 301.6225-3; Reg § 301.6226-1; Reg § 301.6226-2; Reg § 301.6226-3; Reg § 301.6227-1; Reg § 301.6227-2; Reg. § 301.6227-3; Reg § 301.6231-1; Reg § 301.6232-1; Reg § 301.6233(a)-1; Reg § 301.6233(b)-1; Reg § 301.6234-1; Reg § 301.6235-1; Reg § 301.6241-1; Reg § 301.6241-2; Reg § 301.6241-3; Reg § 301.6241-4; Reg § 301.6241-5; Reg § 301.6241-6
IRS has issued final regs under Code Sec. 6221 through Code Sec. 6241 implementing the centralized partnership audit regime. This article discusses the final regs’ guidance on AARs.
Background. A new centralized partnership audit regime was enacted as part of the Bipartisan Budget Act of 2015 (BBA). The new regime added a new subchapter C to chapter 63 of the Code. Generally effective for tax years beginning after Dec. 31, 2017, Sec. 1101 of the BBA repealed the previous (TEFRA) partnership procedures and the existing rules applicable to electing large partnerships, replacing them with the new regime. However, partnerships were allowed to elect to have most of the new partnership audit regime apply to returns of the partnership filed for partnership tax years beginning after Nov. 2, 2015 (i.e., the BBA’s enactment date) and before Jan. 1, 2018. Certain “eligible partnerships” may also elect out of the post-2017 partnership audit procedures under Code Sec. 6221(b).
In general, under the new regime, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year (and any partner’s distributive share thereof) is determined, and any tax attributable thereto assessed and collected, at the partnership level. (Code Sec. 6221) The applicability of any penalty which relates to an adjustment to any such item or share is also determined at the partnership level.
If IRS adjusts any partnership-related items, the partnership, rather than the partners, is subject to the liability for any imputed underpayment and will take any other adjustments into account in the adjustment year. (Code Sec. 6225(a)) As an alternative to the general rule that the partnership must pay the imputed underpayment, Code Sec. 6226 allows a partnership to elect to have its reviewed year partners take into account the adjustments made by IRS and pay any tax due as a result of these adjustments.
Under Code Sec. 6227, partnerships that are subject to the centralized partnership audit regime and that become aware of incorrect partnership-related item may file an AAR, within a specified time frame, to correct their previously filed partnership return.
New guidance. The final regs clarify a number of issues relating to AARs, including:
- IRS received a comment recommending that the final regs clarify that a single AAR can result in multiple imputed underpayments, some of which can be paid while others are pushed out, and that adjustments that do not result in an imputed underpayment can be pushed out. IRS noted that while the current version of the form used by IRS for filing an AAR isn’t designed to accomodate the reporting of multiple imputed underpayments, a partnership may file multiple AARs to allocate adjustments into separate imputed underpayments—effectively achieving the same result. IRS also revised the regs to (i) “accomodate future cases in which an AAR may result in more than one imputed underpayment” and (ii) clarify that, in the case of an election to have the reviewed year partners take into account the adjustments in an AAR, such partners take into account only those adjustments that are associated with the imputed underpayment to which the election relates. (Reg. §301.6227-2(c), Reg. §301.6227-3(a))
- The final regs adopted the rule in Prop Reg §301.6227-3(e) allowing pass-through partners to take into account adjustments requested in an AAR by either making a payment or pushing out the adjustments to the next tier of partners. IRS also made minor revisions to clarify that any adjustment that does not result in an imputed underpayment is taken into account by reviewed year partners. (Reg. §301.6227-3)
- IRS added language to the final regs to clarify that, in the case of a failure to provide the information required under Reg. §301.6227-1(c)(2) (e.g., certain information required by IRS that must be included in a valid AAR), IRS may—but is not required to—invalidate an AAR or readjust items that were adjusted in the AAR. IRS also added the word “valid” to Reg. §301.6227-2(b)(1) to clarify that only a “valid” election under Reg. §301.6227-2(c) “turns off” the partnership’s obligation to pay an imputed underpayment resulting from adjustments requested in an AAR.
- Under the final regs, a pass-through partner must take into account AAR adjustments that, with respect to that pass-through partner, do not result in an imputed underpayment, by furnishing statements to its affected partners—regardless of whether the adjustments that do not result in an imputed underpayment arose pursuant to Reg. §301.6225-1(f)(1)(i) or Reg. §301.6225-1(f)(1)(ii). This rule also applies in situations where the pass-through partner pays an imputed underpayment. Reg. §301.6227-1(e)(2) further clarifies that when a partnership pays an imputed underpayment and there are adjustments that did not result in that imputed underpayment pursuant to Reg. §301.6225-1(f)(1)(i), only the adjustments that did not result in an imputed underpayment are to be included in the statements to its affected partners.
- To conform the rules under Prop Reg §301.6227-2(b)(2) with the rules under Prop Reg §301.6232-1(b), Prop Reg §301.6233(a)-1(b), and Prop Reg §301.6233(b)-1(c), the final regs provide that interest on an imputed underpayment resulting from adjustments requested in an AAR ends on the date the AAR is filed. In the case of any failure to pay an imputed underpayment on the date the AAR is filed, interest is determined in accordance with Code Sec. 6233(b)(2) and Reg. §301.6233(b)-1(c).
IRS also noted in TD 9844 that it is continuing to consider rules that were recommended to it in a comment for how a partnership subject to the centralized partnership audit regime can fulfill the requirements of Code Sec. 905(c), including the rules relating to the assessment and collection of interest on certain refunds of creditable foreign taxes. The final regs under Code Sec. 6227 do not provide rules regarding the application of Code Sec. 905(c), but do include a reserved paragraph regarding notice of change to amounts of creditable foreign tax expenditures. (Reg. §301.6227-1(g))
Effective date. The final regs affect partnerships for tax years beginning after Dec. 31, 2017 and ending after Aug. 12, 2018, as well as partnerships that make the election to apply the centralized partnership audit regime to partnership tax years beginning on or after Nov. 2, 2015, and before Jan. 1, 2018.
References: For the centralized partnership audit rules, see FTC 2d/FIN ¶T-2400 et seq.; United States Tax Reporter ¶62,214.12 et seq.