Tax News Update    Email this document    Print this document  

The IRS has released guidance (Revenue Procedure 2020-23) granting an exception to the prohibition on filing amended partnership returns under the Bipartisan Budget Act of 2015 (BBA) centralized partnership audit regime. As a result, BBA partnerships will be able to file amended partnership returns (Form 1065) for tax years beginning in 2018 and 2019 to take into account any benefits included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Background — BBA restrictions on amending partnership returns

The BBA significantly altered the audit and income tax liability rules governing most partners and partnerships for tax years beginning after December 31, 2017. Among other changes enacted by the BBA, 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 partnership's return. Instead, partnerships subject to the BBA rules must follow new procedures when making corrections to a Form 1065, U.S. Return of Partnership Income. Specifically, once the return due date (including extensions) for the partnership's tax return has passed, instead of filing an amended return with amended Schedules K-1, Partner's Share of Income, Deductions, Credits, a BBA partnership generally must file an administrative adjustment request (BBA-AAR) and additional forms required by the IRS.

The IRS released the final forms required for BBA partnership AARs (Forms 8985 and 8986) in December 2019. See Tax Alert 2019-2166. The new forms generally are to be used in accordance with the BBA-AAR procedures under IRC Section 6227 and the corresponding regulations.

New IRS guidance

To streamline and expedite partnerships' access to the benefits provided in the CARES Act, Revenue Procedure 2020-23 permits eligible partnerships to file amended returns for tax years beginning in 2018 and 2019. Absent the relief being provided in this revenue procedure, a partnership wishing to take advantage of these provisions would be required to follow the BBA-AAR procedures, which could be very cumbersome and time-consuming in the current environment.

Partnerships are eligible for the relief if they filed their Forms 1065 and furnished Schedules K-1 for partnership tax years beginning in 2018 and 2019, before the issuance of Revenue Procedure 2020-23. Partnerships must file the amended returns and furnish the corresponding Schedules K-1 before September 30, 2020. Revenue Procedure 2020-23 specifies that the amended returns may take into account both tax changes brought about by the CARES Act and any other tax attributes to which the partnership is legally entitled.

The amended return should be filed on Form 1065 with the "Amended Return" box checked and with "FILED PURSUANT TO REV PROC 2020-23" written at the top of the return itself and each Schedule K-1. Partnerships under examination for the years at issue may still file amended returns but must follow certain additional procedures. Partnerships that have previously filed an AAR may also file amended returns and should use the items as adjusted in the AAR, as applicable.

Revenue Procedure 2020-23 also includes special rules for partnerships that, under Notice 2019-46, have applied the rules of the proposed global intangible low-taxed income (GILTI) regulations under proposed Treas. Reg. §1.951A-5 for tax years ending before June 22, 2019. For a discussion of Notice 2019-46, see Tax Alert 2019-1557.

Thus, partnerships have the following options to take into account CARES Act benefits for tax years beginning in 2018 and 2019:

1. Amend the partnership's 2018/2019 Form 1065 and issue amended 2018/2019 Schedules K-1 to partners, who will then be able to take the adjustments into account by amending their own 2018/2019 tax returns.
2. Follow the BBA-AAR procedures and file a Form 1065X, Amended Return or Administrative Adjustment Request, for the 2018/2019 tax year and issue Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s),to partners, who will then be able to take the adjustments into account when they file their "reporting year" tax return. The "reporting year" is the year the partnership files the Form 1065X (e.g., 2020 for calendar year taxpayers).

Implications

In addition to considering filing Form 3115, Application for Change in Accounting Method, to implement an automatic method change (when appropriate), partnerships should strongly consider taking advantage of the relief provided in Revenue Procedure 2020-23 by filing an Amended 2018/2019 Form 1065 with amended 2018/2019 Schedules K-1s to take into account any CARES Act benefits for which the partnership qualifies. This option would allow partners to immediately amend their own 2018/2019 tax returns to claim the benefits reflected on the amended Schedules K-1 and obtain a refund of any overpaid tax.

Partnerships that instead opt to follow the BBA-AAR procedures may unnecessarily delay their partners' access to CARES Act benefits, because partners are limited to claiming the benefits flowing from a BBA-AAR on their "reporting year" tax return. For partnerships filing BBA-AARs in 2020, the "reporting year" will in most cases be the partners' 2020 tax returns, which will not be filed until 2021. Further, in the event no "reporting year" tax is owed by a partner, the BBA-AAR procedures could delay the realization of the CARES Act benefits to that partner.

———————————————