How to adjust already-filed partnership returns under the BBA

| 10/15/2020
How to adjust already-filed partnership returns under the BBA

Partnerships subject to the centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) must file an administrative adjustment request (AAR) to adjust already-filed partnership returns. The IRS provided a short period for BBA partnerships to file an amended return rather than an AAR, but that period expired on Sept. 29, 2020. Partnerships need to understand the process for filing AARs and the choices required as part of that process.

When can an AAR be filed?

Generally, partnerships have three years from the later of the date the partnership return was filed or the unextended due date for filing the partnership return to file an AAR. However, no AAR may be filed after the IRS has issued a notice of administrative proceeding (NAP) to the partnership and the partnership representative. A NAP is the statutorily required notice informing a BBA partnership that it is being audited. A BBA partnership still may file an AAR after receiving an IRS notice of selection for examination, which is sent only to the partnership and generally is sent before the NAP.

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Which forms will be used to file a BBA AAR?

Which forms to use to file a BBA AAR depends on two things: 1) whether the partnership will be electronically or paper filing the AAR and 2) whether the partnership will push out adjustments to the partners for the year being adjusted (the reviewed year) or pay the imputed underpayment.

  • Electronic or paper filing. If electronically filing an AAR, attach a Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” to a Form 1065, “U.S. Return of Partnership Income.” A Form 1065X is used to paper file an AAR. A partnership required to electronically file its Form 1065 (generally, one with more than 100 partners) must electronically file an AAR. A partnership that filed its Form 1065 electronically is permitted to paper file an AAR if the partnership had 100 or fewer partners in the reviewed year.
  • Push or pay. A partnership filing an AAR can decide whether to pay any tax attributable to taking the adjustments into account (called an imputed underpayment) or push the adjustments out to the reviewed year partners.
    • Pay the imputed underpayment. Computing the imputed underpayment is complicated. A partnership might be able to make certain modifications that could lower the imputed underpayment. If the partnership pays the imputed underpayment, it must do so when it files the AAR. The imputed underpayment is a nondeductible expense allocated to direct partners of the partnership for the year the AAR is filed (adjustment year partners).
    • Push out the adjustments. A partnership pushing out the adjustments must furnish each partner a Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s),” showing the partner’s allocable share of the adjustments and file copies of the Form 8986 and Form 8985, “Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227),” with the IRS. The forms must be filed and furnished when the AAR is filed.

What to do upon receipt of a Form 8986

What the recipient must do when it receives a Form 8986 depends on whether the recipient is a pass-through partner or a non-pass-through partner. Generally, a pass-through partner is a direct or indirect partner that is itself a partnership, an S corporation, a nongrantor trust, or a decedent’s estate.

  • Non-pass-through partners. A non-pass-through partner that receives a Form 8986 is required to determine the increase or decrease in its tax liability for the reviewed year and intervening years as a result of taking the adjustments on the Form 8986 into account, and it must increase or decrease income tax liability for the year the Form 8986 was sent (the reporting year) by that amount. A Form 8978, “Partner’s Additional Reporting Year Tax,” is used to report this amount.
  • Pass-through partners. A pass-through partner must decide whether to pay the imputed underpayment resulting from taking into account the adjustments or push out the adjustments to its partners for the year to which the adjustments relate.
    • If the pass-through partner is paying the imputed underpayment, it must pay the amount and file Form 8985 with the IRS.
    • If the pass-through partner is pushing out the adjustments, it must furnish each of its partners for the year to which the adjustments relate a Form 8986 and file Form 8985 and copies of the Form 8986s with the IRS.

Other things to remember

The partnership representative for the year being adjusted is the person who must sign the AAR. An AAR may be used to change the partnership representative for the tax year to which it relates provided the AAR makes adjustments to the tax year other than merely changing the partnership representative.

Most partnerships have yet to file an AAR under the BBA procedures. Although the IRS has provided some guidance about filing AARs, these rules are complex and might still be difficult to navigate. Accordingly, taxpayers should consult with their tax adviser for assistance when it appears that they might need to make an adjustment to a previously filed return or when they receive a Form 8986.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax