June 22, 2017 IRS re-issues proposed regulations on new partnership audit regime The IRS re-issued proposed regulations (REG-136118-15) on the new partnership audit regime. As part of the Bipartisan Budget Act of 2015 (the BBA), Congress enacted legislation that overhauls the way in which partnerships are audited. Prior to the BBA, a partnership audit was conducted in accordance with Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) or Electing Large Partnership rules, neither of which provided any mechanism for collecting tax at the entity level. Both methods required that the IRS seek any assessments of underpaid tax directly from the individual owners of the partnerships. With the release of the BBA in November 2015, a new regime was installed to allow for assessment and collection of tax at the partnership level under centralized audit procedures, along with a number of other changes to the process. These new rules are generally effective for most partnerships for tax years starting after December 31, 2017. The initial language of the 2015 BBA left many questions unanswered as to the specific application of the rules to various scenarios, such as tiered partnership structures, partnerships which cease to exist, the manner of making elections and notifications, appropriate allocation for various income types, the method of obtaining refunds for overpaid tax, and effects on a partner's basis in the partnership as a result of such adjustments or payments. Eight months later in August 2016, proposed regulations were released which address the time and manner of early adopting into the BBA regime. Then in December 2016, the House and Senate introduced bipartisan corrections bills, Tax Technical Corrections Act of 2016 (H.R. 6439, 114th Cong. (2016)) and Tax Technical Corrections Act of 2016 (S. 3506, 114th Cong. (2016)). While neither bill was passed during the session, they were seen as a step in the right direction and an indication of how Congress and Treasury might address various open questions in forthcoming regulations. On January 18, 2017, the highly anticipated proposed regulations were released, but were withdrawn before publication as the incoming Trump administration implemented a 60-day regulatory freeze two days later on January 20, 2017. Finally, on June 13, 2017, the IRS re-released the proposed regulations (REG-136118-15) in substantially identical form as the version from January 18, 2017, with the intent to finalize them by the end of calendar year 2017. The proposed regulations provide additional guidance on the applicable procedures, the determination of the amount of taxes, interest and penalties owed, and other consequences of an adjustment to a partnership tax return. Among other provisions, the regulations include procedures for opting out of the new regime, designating a partnership representative, filing administrative adjustment requests, and determining amounts owed by a partnership or its partners from adjustments following partnership exam. (See Tax Alert 2017-168) A significant issue for the asset management industry is whether and in what manner adjustments can be pushed out through multi-tiered pass-through structures. While the re-issued regulations do not include specific guidance on this point, the preamble now states that the government is "considering an approach under section 6226 for tiered partnerships for pushing the adjustments beyond the first-tier partners that will be the subject of other proposed regulations to be published in the near future." Another change from the originally issued January regulations was removal of an example for calculating imputed underpayment of tax. The proposed regulations would affect partnerships for tax years beginning after December 31, 2017, and any partnerships that elect to apply the centralized partnership audit regime for tax years beginning after November 2, 2015 and before January 1, 2018. For tiered partnerships, the IRS is considering an approach under Section 6226 that would allow for pushing adjustments beyond the first tier. That approach will be outlined in forthcoming regulations. Implications The effective date of January 1, 2018 is rapidly approaching and the proposed regulations, whether or not finalized by year-end, provide the most detailed guidance available to date. While audits will not start to be initiated as early as January 2018, unless the partnership affirmatively elects for the new rules to apply to earlier tax years (years beginning after November 2, 2015 and before January 1, 2018), the 2018 tax year is the first year that could be audited under the new regime. Thus, partnerships should consider the effect of the regulations and how they want to address certain issues with their partners, e.g. modifications to legal documents and terms surrounding a future potential assessment of tax. The IRS has requested written and electronic comments be submitted within 30 days of publication in the Federal Register and a public hearing has been scheduled for September 18, 2017. ———————————————
| |||||||||||||||||||||
| |||||||||||||||||||||
