In Revenue Procedure 2019-32, the IRS has granted a six-month extension for certain eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, for tax year 2018, and provide corresponding Schedules K-1 to their partners.

Background

The Bipartisan Budget Act of 2015 (BBA) significantly altered the audit and income tax liability rules governing most partners and partnerships for tax years beginning after December 31, 2017. The centralized partnership audit regime enacted by the BBA applies to all partnerships, unless the partnership makes a valid election under IRC Section 6221(b) not to have those procedures apply. Under IRC Section 6222(a), partners in a BBA partnership must treat partnership-related items, as defined in IRC Section 6241, consistently on the partner's return with how the BBA partnership treated such items on its return.

IRC Section 6031(a) sets forth requirements for partnerships to file Form 1065 and furnish certain information to their partners on Schedules K-1. IRC Section 6031(b) generally prohibits BBA partnerships from amending the information required to be furnished to its partners after the due date of the return. The deadline for partnerships to file Forms 1065 and furnish Schedules K-1, absent an extension, is the fifteenth day of the third month after the end of the partnership's tax year (i.e., March 15 for calendar-year partnerships). For calendar-year partnerships that timely request a six-month extension, the extended deadline is September 15.

Relief for eligible BBA partnerships

The IRS noted that tax years of partnerships beginning in 2018 were the first tax years for which the centralized partnership audit regime was mandatory and the first tax years for which restrictions on amending Schedules K-1 under IRC Section 6031(b) were effective. Taxpayers that timely requested an extension may file original or superseding Forms 1065 and corresponding Schedules K-1 until September 16, 2019 (the extended due date for the 2018 tax year). However, partnerships that timely filed for their 2018 tax year and did not request an extension (i.e., generally by March 15, 2019) would be prohibited under IRC Section 6031(b) — without the current relief — from amending their Schedules K-1 for the 2018 tax year in the event of errors on their already-filed Form 1065.

Under the relief provided in Revenue Procedure 2019-32, the IRS will treat the timely filing of Form 1065 by certain eligible BBA partnerships as a timely and appropriately filed request for a six-month extension of the deadline to file Form 1065. As a result, BBA partnerships that timely filed a Form 1065 and timely furnished all required Schedules K-1 before the non-extended deadline may file a superseding Form 1065 and furnish corresponding Schedules K-1 before the expiration of the extended deadline. The superseding return would replace any prior return for the tax year for purposes of determining the partnership's treatment of partnership-related items under IRC Section 6222.

To be eligible for the relief, for the applicable tax year the partnership must have: (1) not made an election under IRC Section 6221(b), (2) timely filed Form 1065, and (3) timely furnished all required Schedules K-1. The eligible partnership must also file a superseding Form 1065 and furnish corresponding Schedules K-1 on or before the date that is six-months after the non-extended deadline. This relief applies only to partnership tax years that ended prior to the issuance of Revenue Procedure 2019-32 and for which the extended due date for such partnership tax year is after July 25, 2019.

To apply the relief provided in Revenue Procedure 2019-32, eligible partnerships should file a superseding Form 1065 and furnish corresponding Schedules K-1 in the same manner as the original return and Schedules K-1 and write on the top of the superseding Form 1065 "SUPERSEDING FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32."

Implications

Revenue Procedure 2019-32 provides welcome relief for partnerships that are subject to the BBA rules and filed a timely 2018 tax year partnership return without extension. It allows such partnerships to make corrections to the originally filed partnership return — including the correction of missed elections that are required to be filed by the due date of the partnership return, with extension — and issue updated Schedules K-1. If a superseding return is filed within the extended filing due date provided for by this Revenue Procedure, it will replace the original return for all purposes.

This could allow investment partnerships, such as private equity funds and other alternative asset management funds, that already filed their 2018 tax return without an extension to potentially file superseding returns and re-issue Schedules K-1 to their investors. This would allow such funds to address recently issued Treasury regulations and also file elections not included on the original tax return. For example, recently issued regulations changed rules regarding: who is an inclusion shareholder of a controlled foreign corporation, the application of global intangible low-taxed income (GILTI) and Subpart F income inclusions, and the determination of passive foreign investment companies and related elections (e.g., Qualifying Electing Fund and mark-to-market elections). The ability for funds to revise and re-issue Schedule K-1s could obviate the need for their partners (including fund of fund investors) to file a Notice of Inconsistent Treatment on Form 8082 to correct and cure some of these types of issues.

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