On March 25, IRS issued interim guidance for the Office of Appeals on the new centralized partnership audit procedures enacted by the Bipartisan Budget Act of 2015 (BBA). Under the BBA, a partnership is liable for tax due as a result of an audit, called an imputed underpayment, unless an election is made to push out the audit adjustments to the partners for the year under audit. When the IRS initially computes the imputed underpayment based on proposed audit adjustments, it does not take into account certain partner-specific circumstances, such as tax-exempt status or lower tax rates, which might reduce the tax due. After receipt of the formal notice of proposed partnership adjustments (NOPPA), the partnership has an opportunity to request a modification of the imputed underpayment so those circumstances can be taken into account to reduce the imputed underpayment.
Both the preamble to the recently published final regulations and instructions to Form 8980, “Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c),” state that partnerships will have an opportunity to appeal an agent’s preliminary audit adjustments and computation of the imputed underpayment before the NOPPA is issued. Little else about how BBA appeals will work has been made public until release of this interim guidance. Although the focus of the new guidance is case management within the Office of Appeals, it does provide some important insights into appeal rights under the BBA:
Both the preamble to the recently published final regulations and instructions to Form 8980, “Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c),” state that partnerships will have an opportunity to appeal an agent’s preliminary audit adjustments and computation of the imputed underpayment before the NOPPA is issued. Little else about how BBA appeals will work has been made public until release of this interim guidance. Although the focus of the new guidance is case management within the Office of Appeals, it does provide some important insights into appeal rights under the BBA:
- BBA review will be centralized. All incoming BBA appeals cases will be routed to the Appeals Tax Equity and Fiscal Responsibility Act (TEFRA) team (ATT). ATT will assign BBA appeals cases to an ATT Appeals officer who will work both TEFRA and BBA appeals cases. While coordination and specialization provide greater consistency and technical expertise, it can result in slower assignment and resolution of cases.
- An opportunity will exist to appeal denial of a request for modification, but the guidance provides no standard for review. The procedures in the new guidance require ATT referral for modification dispute screening. This is the first time the IRS has stated that there will be an opportunity to go to the Office of Appeals to challenge an IRS decision made during the modification process.
- Accordingly, it appears that now there will be two opportunities to go to the Office of Appeals as part of the BBA audit process. The first time is after the agent preliminarily determines the adjustments and computation of the imputed underpayment; the second time appears to be after the IRS makes a determination with respect to the partnership’s request for modification.
- IRC Section 6225(c)(8) provides the IRS with broad discretion to approve or deny a request for modification. As a result, it is unclear what standard the Office of Appeals will use to review the IRS’ denial of a request for modification and whether an Office of Appeals review will be meaningful. This broad discretion will be a factor when partnerships consider whether to appeal a denial of a request for modification.
- BBA appeals often will require a statute extension. BBA appeals cases will not be accepted unless at least 365 days remain before the period of limitations for making adjustments under IRC Section 6235 expires. Partnerships should keep this in mind when deciding whether to seek Office of Appeals review, particularly because there likely will be two opportunities for review, which could add significant time to the BBA audit process.
