Partnership Audit Tax

Tiered Partnership Regulations – New Audit Rules

IRS Releases Tiered Partnership Regulations as Part of Implementation of New Partnership Audit Rules

On December 19, 2017, the IRS published the latest regulations implementing the centralized partnership audit regime passed into law as part of the Bipartisan Budget Act (BBA) of 2015.
These proposed regulations provide rules on the ability of pass-through partners to “push out” imputed underpayments further down the chain in a tiered partnership structure, make changes to a few provisions in the June 2017 regulations (hereafter referred to as the “June proposed regulations”), and promulgate other administrative and procedural rules. This article will begin by providing the background information necessary to put these new regulations into proper context and then move on to explain the content of the regulations.

Background

Section 1101 of the BBA enacted the centralized partnership audit regime replacing the audit rules instituted under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.
The BBA rules assess and collect any additional taxes or penalties resulting from an audit directly at the partnership-level instead of from the partners as was previously the case.
Partnerships with 100 or fewer eligible partners (an individual, corporation, or the estate of a deceased partner) during the entire year can opt out of the centralized regime.

An assessment of tax on a partnership resulting from an audit under the new regime is known as an imputed underpayment. A partnership generally computes its imputed underpayment by multiplying the net audit adjustment by the highest federal individual income tax rate while also taking into account its credits. However, a partnership can avoid paying the imputed underpayment by electing to “push out” the underpayment to the persons who held an interest in the partnership during the tax year under review (this is known as an IRC §6226 election).
The June proposed regulations outlined, among other items, the process for calculating an imputed underpayment and making a “push out” election, but reserved the issue as to how a “push out” election functions in a tiered partnership structure.

Tiered Partnership Rules

Under the proposed regulations, if a pass-through partner (defined as a partnership, S corporation, certain trusts, or a decedent’s estate) receives a statement based upon its partnership making a §6226 election, the partner can choose to (1) pay the amount, or (2) “push out” the amount to its own partners that held interests during the taxable year in question. The choice of whether to “push out” the adjustment can continue throughout a chain of a multi-tiered partnership arrangement. The pass-through partner must furnish a push-out partner with a statement including all of the information prescribed by proposed Treas. Reg. §301.6226-3(e)(3)(iii). The pass-through partner must file the statement with the IRS along with a transmittal that includes a summary of the statements and any other information required by forms, instructions, and other guidance. Although while similar to those furnished by the pass-through partner, different rules apply to push-out partners regarding the time for filing and providing the IRS with statements, the content of the statements, and how the partners will take the adjustments into account.

Statements provided by a pass-through partner to a lower tier partner must be furnished no later than the extended due date for the return adjustment year of the partnership.
The affected partners will not incur penalties for failure to file or pay tax if the additional reporting year tax is paid within 30 days after the due date for the furnishing of the statements by the pass-through partner.
If the pass-through partnership instead chooses to pay the audit adjustment such payment is due no later than the extended due date for the return adjustment year of the partnership.

The proposed regulations also provide a mechanism to address pass-through partnerships in tiers that fail to comply with the requirements to “push out” or pay the adjustment.

Other Regulatory Changes

The June proposed regulations required the partnership to raise any defenses during the partnership-level audit examination regardless of whether a defense relates to the facts and circumstances pertinent to the partnership or to one of its partners.
The new proposed regulations completely reverse the June proposed regulations with respect to partnerships that make a §6226 election by allowing the individual partners to assert defenses pertaining to their specific facts and circumstances.

The proposed regulations also describe how a partnership addresses adjustments requested in an administrative adjustment request (AAR) when electing to “push out” the adjustment; eliminate both the safe harbor and interest safe harbor outlined in the June proposed regulations; and promulgate several administrative and procedural regulations necessary to implement the new audit regime.

For more information on these recent regulations and the centralized partnership audit regime please contact a tax professional, perhaps Kurtz & Company, Business Income Tax Specialist 🙂

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas. https://www.linkedin.com/in/drquintana