20 February 2019 IRS releases form to certify tax-exempt status of partner in partnership requesting modification of imputed underpayment The IRS has released Form 8983, Certification of Partner Tax-Exempt Status for Modification Under IRC Section 6225(c), to be used in conjunction with Form 8980, Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c), to certify that a partner in a partnership is tax-exempt when the partnership is requesting modification of an imputed underpayment under Section 6225(c). Both forms are only relevant after an adjustment is proposed during an IRS audit of the relevant partnership that is conducted under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA). The BBA overhauled the manner in which partnerships are audited and how any resulting tax liability is computed, assessed and collected. Specifically, the BBA adopted a new regime that allows for assessment and collection of tax at the partnership level under centralized audit procedures, along with other changes to the partnership audit process. These new rules are effective for most partnerships for tax years beginning after December 31, 2017. Section 6225, as amended by the BBA, addresses partnership adjustments made by the IRS under the centralized partnership regime and the determination of any resulting imputed underpayment to be paid by the partnership. The determination is made by netting all adjustments of income, gain, loss or deduction and multiplying the net amount by the highest rate of tax in effect for the reviewed year. The IRS reports an imputed underpayment to a partnership in a notice of proposed partnership adjustment (NOPPA). Under Section 6225(c), the partnership representative may request that the IRS modify an imputed underpayment under procedures established by the Secretary. See Form 8980, Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c). Section 6225(c)(3) generally provides for the establishment of modification procedures for determining the imputed underpayment without regard to the portion of adjustments that the partnership demonstrates is allocable to a partner, direct or indirect, that would not owe tax by reason of its status as a tax-exempt entity within the meaning of Section 168(h)(2). Section 168(h)(2) generally includes US and non-US entities exempt from tax under the Code, including organizations exempt under Section 501(a), as well as persons exempt under Section 892 and certain non-US persons. Modification requests may only be submitted by the partnership under audit by the IRS and only after a NOPPA is issued (a partnership under examination requesting the modification is referred to as the "source partnership").
Under the IRS instructions to Form 8983, in order for the tax-exempt partner to accurately complete Form 8983, the partnership representative must provide to each relevant partner, as defined in Treas. Reg. Section 301.6225-2(a), all necessary information on all partnership adjustments set forth in the partnership's NOPPA that are properly allocable to that partner, regardless of whether the adjustments resulted in an imputed underpayment. Concurrent with the release of Form 8983, the IRS issued Form 8980, which is used by a partnership to request modification of an imputed underpayment under Section 6225(c). When a partnership requests modifications to the partnership's imputed underpayment(s) on Form 8980 for a tax-exempt partner under Section 6225(c)(3), in addition to completing Part II of Form 8980, the partnership representative of the source partnership must attach a Form 8983, completed and signed by the tax-exempt partner, for each such tax-exempt partner. In addition, when a foreign partner claims a modification either by reason of a provision other than Section 501(a), which either exempts persons from tax or excludes certain income from tax (e.g., an entity exempt under Section 892 or by reason of Section 881(c), the portfolio interest exception), or by reason of a provision of an applicable income tax treaty, Form 8983 should not be filed. Instead, Form 8980, Part VIII should be completed by the partnership representative of the source partnership. For tax years beginning after December 31, 2017, for partnerships subject to the BBA regime, all IRS adjustments to partnership income, gain, loss, credits and deductions are calculated at the partnership level, and any tax liability resulting from such adjustments is referred to as an imputed underpayment. An imputed underpayment is calculated by appropriately "netting" all partnership adjustments for the tax year and applying the highest applicable individual or corporate tax rate in effect at that time. If the IRS proposes an imputed underpayment in a NOPPA, the partnership may request a modification by filing Form 8980, in order to reduce the imputed underpayment of the source partnership. One way to have the IRS agree to reduce the source partnership's imputed underpayment set forth in a NOPPA is to request a modification that takes into account the portion of the adjustment allocable to a partner that would not owe tax by reason of its status as a tax-exempt entity under Section 168(h)(2) by submitting Form 8983. Form 8980 must be submitted to the IRS to request modifications to imputed underpayments after the IRS issues a NOPPA setting forth the proposed audit adjustments. The partnership representative has 270 days, beginning on the date the NOPPA is issued, to submit the modification requests using Form 8980. In accordance with Section 6225(c), Form 8980, Section B, describes the different types of modifications to imputed underpayments that are available. Form 8983 supplements Form 8980 and is the documentation that the IRS requires be submitted as evidence of certain tax-exempt partners' tax-exempt status. If a partnership requests modification due to a partner's tax-exempt status under either Section 168(h)(2)(A) or Section 501(a) (with respect to foreign partners), failure to submit both Form 8990 and Form 8983 would cause denial of the modification. The BBA regime imposes an obligation on the partnership to make a payment to the IRS for an imputed underpayment that could reduce the value of a tax-exempt partner's interest in the partnership or increase the tax burden borne directly or indirectly by the tax-exempt partner. Tax-exempt entities that are partners, either direct or indirect, in a partnership that is subject to an IRS examination under the BBA regime should be mindful of the IRS's ability to now assess and collect tax at the partnership level. It is critical that partners know who the partnership representative is for the source partnership and try to ensure that proper procedures are in place to receive timely notification of IRS examinations and proposed adjustments. Partners making a new investment in a partnership should consider requiring the partnership representative to comply with available modification procedures. Furthermore, tax-exempt partners should ask to review (or have the right to review) any correspondence from the partnership and partnership representative and between the IRS and the partnership representative regarding the status of the examination and, in particular, any proposed imputed underpayments, to determine if the partnership can seek a modification by filing Forms 8980 and 8983 on behalf of the tax-exempt partner. Failure to request such a modification could result in the partnership (and indirectly, the tax-exempt partner) bearing the burden of a tax on an imputed underpayment that otherwise would qualify as eligible for a reduced rate or exemption from tax. -- For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
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