January 29, 2021
IRS updates instructions for BBA partnerships filing administrative adjustment requests
The IRS has released final, updated instructions for two forms used by partnerships to file administrative adjustment requests (AARs) under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA):
The updated instructions, dated January 2021, include some noteworthy changes from prior years' instructions. The IRS has not updated the underlying forms.
Requirement to always include computation of imputed underpayment (IU)
Both Forms 1065X and 8082 include an item asking if "the adjustments on the AAR result in an imputed underpayment for the reviewed year" (Form 1065X, Section 2, Box B; Form 8082, Part 1, line 1, Item B). As in prior years, the instructions for both forms state, for this item, that BBA partnerships need to determine, based on all available IRS guidance, whether the partnership adjustments result in an imputed underpayment (IU).
The updated instructions for both forms add that BBA partnerships must make, and present on the AAR, an IU calculation even when the IU is zero or less than zero or the adjustments do not result in an IU.
The updated instructions reiterate this requirement in the instructions for Form 1065X, Part IV, and Form 8082, Part III. These instructions further state that a partnership must always include an IU, even when the partnership makes an election under IRC Section 6227(b)(2) to have its reviewed-year partners take all the adjustments into account (push-out election).
When adjustments do not result in an IU, the instructions further clarify that the IU should be shown as zero.
'Partnership-related item' and 'residual grouping' definitions
The updated instructions include a detailed explanation of how to compute an imputed underpayment. Consistent with the prior version of these instructions, they continue to define a partnership-related item (PRI) for BBA partnerships as "any item or amount with respect to the partnership that is relevant in determining the income tax liability of any person, without regard to whether the item or amount appears on the partnership's return." They add that this "includes IU and an item or amount relating to any transaction with, basis in, or liability of the partnership."
The updated instructions add a definition of "residual grouping" within the detailed guidance included on "Figuring the IU." The instructions explain that adjustments are placed in the residual grouping if they don't belong in the reallocation, credit or creditable expenditure groupings. They further clarify that the residual grouping includes any adjustment to a PRI that derives from an item that would not have been required to be allocated by the partnership to a partner under IRC Section 704(b), such as an adjustment to a liability amount on the balance sheet.
These revised instructions for filing a BBA AAR add an increased administrative burden on partnerships that elect to "push out" the AAR adjustments to the partners by requiring BBA AARs to always include a computation of the IU (even when the IU is zero or less than zero or the adjustments don't result in an IU), as determined under IRC Section 6225(b). The revised instructions add to this administrative burden by requiring that documentation supporting the computation of the imputed underpayment amount also be included with the AAR. Adding to the complexity of the IU computation is the inclusion of non-income items in the "residual grouping." It is unclear how a partnership should treat non-income items for purposes of this IU computation. The special enforcement regulations proposed in November 2020 (see Tax Alert 2020-2822) suggest that each of these "non-income" items can be presumed not to be included in determining an IU (unless the IRS later determines that they should be). The regulations do not expressly allow taxpayers to rely on them until they are finalized.