Architecture of BBA Partnership Audit Regime Continues to Develop

| 8/22/2019
Congress enacted a new partnership audit regime to replace the Tax Equity and Fiscal Responsibility Act (TEFRA) as part of the Bipartisan Budget Act of 2015 (BBA). Generally, the BBA regime is effective for partnership tax years beginning on or after Jan. 1, 2018. Therefore, a majority of partnerships will encounter the BBA for the first time when filing their 2018 return. On its 2018 federal tax return, an eligible partnership may elect out of the BBA regime under IRC Section 6221(b). If the partnership does not elect out of the BBA, it will be required to identify an eligible partnership representative under IRC Section 6223 for the taxable year. If the partnership representative is an entity, the partnership also is required to identify an eligible designated individual to act on behalf of the partnership representative. The partnership representative has sole authority to act on behalf of the partnership for purposes of the BBA, and the partnership representative’s actions bind both the partnership and the partners.

Partnerships also may elect into the BBA regime early for tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018. The IRS has stated that as of February 2019 more than 100 partnerships have elected into the regime early.

The U.S. Department of the Treasury and the IRS have established the framework for implementing the regime by publishing most of the final regulations. In addition, the IRS has begun to release some of the details of how the regime will work. For instance, the IRS issued interim guidance centralizing review of BBA cases within the Office of Appeals and establishing examination procedures for partnerships that elected in early. In addition, earlier this year, the IRS released forms to be used for the modification procedures, including the master Form 8980, “Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c),” with its 24 pages of instructions. More recently, the IRS released draft Form 8978, “Partner’s Audit Liability Under Section 6226,” and draft Schedule A (Form 8978), “Partner’s Audit Liability Under Section 6226 (Schedule of Adjustments),” for partners to report additional Chapter 1 tax resulting from taking into account adjustments in a push-out statement issued under IRC Section 6226. However, instructions for this form have not yet been released.

Treasury and the IRS recently released Revenue Procedure 2019-32, which provides relief to BBA partnerships that timely filed unextended returns for 2018. The revenue procedure provides extra time to make or change elections under the Tax Cuts and Jobs Act of 2017 as a result of later released guidance. This relief is intended to mitigate an unexpected consequence of the BBA regime that became apparent as taxpayers began operating under the new rules. It is anticipated that the IRS will release additional guidance and updates as it continues to develop the details of its processes and procedures to implement the BBA regime.

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Rochelle Hodes
Rochelle Hodes
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