The IRS form (Form 7036) for electing to apply the new partnership audit regime enacted by the 2015 Bipartisan Budget Act (BBA), for partnership tax years beginning after November 2, 2015 (the BBA enactment date) and before January 1, 2018, is now available. In addition, the IRS has released a memorandum (the IRS Memo) on internal procedures related to the election.

Background

The BBA, enacted November 2, 2015, repealed the existing TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures for partnership audits, and implements a new audit regime for most partnerships. While the new regime generally applies to returns filed for partnership tax years beginning after December 31, 2017, BBA Section 1101(g)(4) generally allows partnerships to elect to apply the new audit regime to any of their partnership returns filed for partnership years beginning after November 2, 2015, and before January 1, 2018 (an Eligible Tax Year).

On August 5, 2016, the IRS published temporary and proposed regulations setting forth the time and manner for electing early application of the new partnership audit regime. For a detailed discussion, see Tax Alert 2016-1344. On June 13, 2017, the IRS also published proposed regulations addressing most of the substantive provisions under the new partnership audit regime. See Tax Alerts 2017-168 and 2017-1002.

Form 7036 and the IRS Memo

The IRS Memo instructs examiners to mail the new "Letter 2205-D" for the initial taxpayer contact in all partnership examinations. If the examination pertains to an Eligible Tax Year, the Tax Matters Partner or an individual authorized to sign the partnership return for the tax year under examination may make the election for early application of the new partnership audit regime. The time for making this election is generally within 30 days of the date on which the IRS first notifies the partnership that it has been selected for examination.

To make the election, partnerships may use Form 7036, Election Under Section 1101(g)(4) of the Bipartisan Budget Act of 2015, but may also use their own written statements, provided the statements meet the requirements for the election. The IRS Memo reviews the specific requirements for making the election, which were set out in the August 2016 temporary regulations. The IRS Memo also describes the internal IRS procedures for examiners to follow in response to such an election.

Implications

When the IRS notifies a partnership that it will audit the return for an Eligible Tax Year, the partnership and its partners need to consider whether an election into the BBA partnership audit regime would be beneficial for such year or years. Although this is a specific facts-and-circumstances determination, it is likely that many partnerships will not elect into the new rules early. The new rules might produce unfavorable consequences, and there is much uncertainty about how the rules will apply to tiered structures or affect tax attributes such as basis and capital accounts. Any partnerships considering electing in early should review partnership agreements for purposes of deciding whether a partnership can make the election and who has the authority to decide to do so.

Taxpayers should also confirm whether the tax year(s) under examination are Eligible Tax Years.

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