The IRS has issued a Memorandum for Appeals Employees (AP–08–1019–0013, dated October 18, 2019) that provides interim guidance for IRS Appeals employees on procedures under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA).

Background

The BBA significantly altered the audit and income tax liability rules governing most partners and partnerships for tax years beginning after December 31, 2017. The BBA regime, which allows for assessment and collection of tax at the partnership level under centralized audit procedures, applies to all partnerships, unless the partnership makes a valid election not to have those procedures apply.

In January 2019, the IRS issued final regulations (TD 9844) implementing the BBA partnership audit regime, and announced (Notice 2019-06) plans to issue additional proposed regulations addressing "special enforcement matters." See Tax Alert 2019-0110.

In March 2019, the IRS issued a Memorandum for Appeals Employees (AP–08–0319–0005) with initial interim guidance for IRS Appeals employees on the BBA audit procedures.

Interim guidance

The new memorandum supplements the guidance included in the March 2019 memorandum with additional interim guidance for IRS Appeals employees on the BBA audit procedures. The guidance will be added to the Internal Revenue Manual (IRM) Part 8.19 (Appeals Pass-Through Entity Handbook) in new IRM 8.19.14 (Bipartisan Budget Act of 2015 Procedures). The memorandum includes new IRM 8.19.14 as an attachment. The guidance is effective as of the date of the memorandum.

The guidance covers different phases of the BBA regime, including (1) early election into BBA, (2) an Administrative Adjustment Request (AAR), (3) a Notice of Proposed Partnership Adjustment (NOPPA), (4) modification disputes, and (5) a Notice of Final Partnership Adjustment (FPA).

The memorandum highlights various procedural changes:

• Early elections.For tax years beginning after November 2, 2015, and before January 1, 2018, eligible partnerships may make an early election into the BBA regime within 30 days of the date that the IRS first notifies the partnership in writing that its return has been selected for examination. The election is made on Form 7036 (Election under Section 1101(g)(4) of the Bipartisan Budget Act of 2015) by the Tax Matters Partner or an individual authorized to sign the partnership return for the tax year under examination. After a valid election is received by the IRS, an IRS examiner will issue Letter 5893 (Notice of Administrative Proceeding). An early election may also be made after January 1, 2018, when filing an AAR under IRC Section 6227 for tax periods beginning after November 2, 2015, and before January 1, 2018.
• Appeals rights and procedures. BBA cases have Appeals rights. The IRS examiner will issue a 30-day BBA letter (Letter 5891) with a summary report for the taxpayer to request an Appeals hearing when there is a dispute on any BBA case (including disputes on substantive audit issues, penalties and/or imputed underpayment adjustment groupings).
• NOPPA and modification requests. At the end of the Appeals process and upon the issuance of the NOPPA for all disputed tax issues (resolved and unresolved), Appeals will send the case to the "Ogden BBA Unit" for processing. The partnership may request modification in response to the NOPPA. If there is a dispute regarding the modification, the taxpayer will have an opportunity to appeal the dispute. An Appeals modification hearing is separate from the Appeals hearing on substantive audit issues, penalties and/or imputed underpayment adjustment groupings. During a modification hearing, Appeals will not reconsider previously disputed tax issues resulting from an earlier Appeals hearing on those issues.
• FPA. In general, the IRS Large Business & International division (LB&I), not Appeals, will issue the FPA notice. The FPA will allow the partnership to request judicial review of the adjustments and/or a push out of the adjustments for its partners.

Implications

The changes to the partnership audit provisions contained in the BBA have significantly altered the audit and income tax liability rules governing partners and partnerships, and as such will have significant implications for partners of partnerships. The BBA partnership provisions have made significant changes to the IRS examination and appeals procedures that are followed when a partnership subject to the BBA rules is audited by the IRS. This memorandum provides welcome guidance on the procedures to follow to request IRS Appeals consideration during the various phases of a BBA partnership audit. It is welcome news that Appeals consideration will be available for proposed audit adjustments as well as modification requests.

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