The IRS has provided interim guidance to its examiners on handling early “opt-in” elections for the new centralized partnership audit regime, for tax periods beginning after November 2, 2015, and before January 1, 2018. Specifically directed toward Large Business and International Division and Small Business/Self-Employed Division employees, the guidance covers the mechanics of what examiners must do during the initial phase of handling an “early elect-in” election.
Temporary regulations (TD 9730, August 2016) already spelled out for taxpayers rules regarding the time, form and manner for making the election. The latest guidance reflects these regulations from the IRS examiner’s perspective, with step-by-step instruction on required paperwork and deadlines.
Background. The Bipartisan Budget Act of 2015 (BBA) centralized partnership audit regime replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) audit procedures beginning with 2018 tax year audits, but with an earlier “opt-in” opportunity for electing partnerships. Under the new centralized partnership audit regime, adjustments to partnership income, gain, loss, deduction or credit are determined at the partnership level, rather than at each partner’s level, and that any additional tax, referred to as the imputed underpayment, is collected from the partnership. Although this new audit regime is generally not effective for audits of partnership tax years beginning before 2018, the BBA allows partnership to elect to have the new regime apply earlier, pursuant to the regulations that specify the time, form, and manner for making this election.
Instructions to IRS auditors. The IRS memorandum asks examiners to refer to the “early elect-in” rules in TD 9780. In addition, however, the instructions map out, in practical terms, what examiners should look for in assuring compliance. These include, among others, the following considerations:
- An IRS examiner should provide written notification of the partnership’s selection for examination via a new Contact Letter (Letter 2205-D).
- The “opt in” election can be made for any timely filed, late filed or non-filed partnership return as long as the election is made within 30 days, with no extensions, from the date of written notification of selection for examination.
- A tax matters partner (TMP) or an individual authorized to sign the partnership return may make the “opt-in” election; however, during the subsequent examination, new Code Sec. 6223 requires that the partnership must designate a “partnership representative.”
- To make the election, the partnership should use new Form 7036, Election Under Section 1101(g)(4) of the Bipartisan Budget Act of 2015.
- Immediately upon receiving an election, the examiner is instructed to notify the IRS “BBA Point(s) of Contact (BBA POC)” designated to monitor elections and provide subject matter expertise regarding the BBA centralized partnership audit regime.
- Taxpayers should be informed of Incomplete Forms 7036 as quickly as possible, but the 30-day deadline will keep running.
- An IRS examiner must wait at least 30 days after a valid election is received before issuing a notice of administrative proceeding (NAP) in case the partnership wants to file an Administrative Adjustment Request (AAR).
The new partnership audit rules are impacting many partnerships immediately. Partnership agreements need to be renegotiated and revised to reflect the liability that will be expected to be shouldered by each partner under the new regime. Please contact this office if you wish a review of an existing partnership agreement in light of these new liability rules.