Partnerships, a pandemic, and Rev. Proc. 2020-23

By Shamik Trivedi, J.D., LL.M., Washington, D.C.

Editor: Valrie Chambers, CPA, Ph.D.

Partnerships subject to the centralized partnership audit rules of the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, now can file amended returns for tax years beginning in 2018 and 2019. To the uninitiated, the filing of an amended return may not seem like a cause for celebration or note, but for BBA partnerships, it reflects a significant development. Adjusting a partnership tax return under the BBA is not a simple task for the partnership or its partners.

Rev. Proc. 2020-23, issued April 8, allows BBA partnerships to avoid having to file an administrative adjustment request (AAR), which, prior to this guidance, was the only way for a BBA partnership to make an adjustment to a previously filed tax return. The filing of an AAR can be a complex undertaking.

This discussion first provides an overview of the AAR process and then explains why BBA partnerships do not need to rely on AARs to adjust their 2018 or 2019 tax returns under the relief granted in Rev. Proc. 2020-23. Whether the partnership should file an amended return, however, is a more complex question.

The AAR process in general

The centralized partnership audit procedures went into effect for partnership tax years beginning after Dec. 31, 2017 (though partnerships could also elect to apply BBA procedures for certain prior tax years as well). The new procedures were enacted as a response to the fact that, among other things, the IRS had difficulty in conducting examinations of large, especially tiered, partnerships, where the collection of tax may be far removed from the partners of the partnership under exam.

Under the BBA, and much like under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248, the IRS conducts examinations at the partnership level to determine the accuracy of a partnership's tax return. Unlike under TEFRA, if the examination results in an imputed underpayment of tax, a BBA partnership may pay the underpayment on behalf of the partners under Sec. 6225. This is the default rule of the BBA. If the partnership does not want to pay the underpayment, it can elect to "push out" the underpayment, and responsibility for payment, to the individual partners under Sec. 6226.

The determination of whether a partnership should pay under the default rule of Sec. 6225 or push out under Sec. 6226 should be based on the facts and circumstances of each partnership and its partners and should not be taken lightly. Those considerations are outside of the scope of this discussion, but partnerships should analyze their situation carefully.

If a partnership determines that a previously filed tax return should be adjusted, whether to reflect a negative or a positive adjustment, each of which could have an impact on the partners, the partnership has two options. If the due date for filing the return has not yet passed, a partnership need do no more than file a superseding Form 1065, U.S. Return of Partnership Income, and its supporting Schedules K-1, Partner's Share of Income, Deductions, Credits, etc. If the due date for filing the return has passed, the partnership must file an AAR because Sec. 6031(b) prohibits a partnership from changing a previously filed Form 1065 or Schedule K-1 unless it is through an AAR (except when an exception applies, such as Rev. Proc. 2020-23).

Under the BBA, much like under TEFRA, a partner's return must be consistent with the partnership's return. Unlike under TEFRA, the IRS can make a computational adjustment to a partner's return (i.e., correct a math error) if it is filed inconsistently with the partnership under Sec. 6222. A partner can always give notice to the IRS by filing Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), and take the inconsistent position to avoid a math error adjustment.

Sec. 6227, which governs the filing of AARs, requires that any adjustment be taken into account for the partnership tax year in which the AAR is filed (the so-called reporting year), under Sec. 6227(b). A partnership can pay an adjustment that results in an imputed underpayment with the filing of an AAR, but favorable adjustments are required to be pushed outunder Regs. Sec. 301.6227-2(d).

To submit an AAR, the partnership electronically files an amended Form 1065 with a Form 8082 (or paper files a Form 1065X, Amended Return or Administrative Adjustment Request (AAR)), which describes the adjustments to be made to the previously filed return, as well as certain other forms, including but not limited to:

  • Form 8985, Pass-Through Statement — Transmittal/Partnership Adjustment Tracking Report; and
  • Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s).

The partners receiving the AAR statement and these other forms are then required to determine the correction amounts for the year being adjusted, as well as all intervening years, and report the correction amounts on their returns for the reporting year using Form 8978, Partner's Additional Reporting Year Tax. Even then, however, the AAR may not result in an actual "refund" to the partner. Under Regs. Sec. 301.6227-3(b), the additional reporting year tax, if negative, only serves to reduce the Chapter 1 tax of the partner in the reporting year — effectively limiting the refund to the tax paid in by that partner. This is illustrated in Regs. Sec. 301.6227-3(b)(2)(ii). For example, if the reporting year is a loss year and the partner has limited the amount of estimated tax he or she is paying, a large "refund" from the adjustment year may not create much benefit to the partner.

The additional reporting-year tax may not be carried forward or back. In other words, the adjustment on the AAR is treated like a nonrefundable credit to the partner. Therefore, a partner may be better off without the partnership filing an AAR, given the adjustment is treated similarly to a nonrefundable credit. (See, generally, Kraus, "The Push-Out Election and AARs Might Not Get You Back to Kansas," 165 Tax Notes Federal 1429 (Dec. 2, 2019))

A process in theory but not practice

Practically speaking, the AAR process has raised numerous concerns for both partnerships and partners, not the least of which is, "How do I do this?" Although the BBA rules technically have been in effect for partnership tax years beginning after Dec. 31, 2017, partnerships and partners have little experience in filing an AAR under the BBA mostly because many of them have not yet had to. This is because the IRS has granted many BBA partnerships temporary relief from the AAR process, first to help with the transition to the new system and, more recently, as will be discussed later, due to the COVID-19 crisis.

In July 2019, the IRS granted transition relief in response to concerns by partnerships and tax professionals about the AAR process and how to use it to correct previously filed Forms 1065 to reflect the treatment of certain items such as the Sec. 199A qualified business income deduction and the global intangible low-taxed income (GILTI) tax. The relief in Rev. Proc. 2019-32 provided for a deemed extension period for BBA partnerships that had filed 2018 partnership returns but had not requested extensions. Those partnerships that had filed on or before the unextended due date of March 15, 2019, could file a superseding Form 1065 and issue corrected Schedules K-1 on or before the extended due date of Sept. 16, 2019.

Without such transition relief, the IRS explained, some partnerships that had already filed a return and had not requested an extension could not amend the Form 1065 or the Schedules K-1 because of the restriction of Sec. 6031(b). After Rev. Proc. 2019-32, however, BBA partnerships that otherwise would have had to consider filing AARs could instead take the easier path of filing a superseding return.

One month later, in August 2019, the IRS released Notice 2019-46, which provided that partnerships could rely on proposed GILTI regulations under Prop. Regs. Sec. 1.951A-5, rather than final regulations, which had been issued in June 2019.

Rev. Proc. 2019-32 and Notice 2019-46 each recognized the difficulty BBA partnerships faced in adjusting previously filed returns. Notice 2019-46 states clearly in Section 2.04 that Treasury and the IRS "are aware that many domestic partnerships and S corporations furnished Schedules K-1 to their partners and shareholders on or before the date of publication of the [GILTI] Final Regulations on June 21, 2019." It goes on to say that "the issuance of corrected Schedules K-1 consistent with the Final Regulations under these circumstances may result in significant additional costs to these domestic partnerships and S corporations and significant burden to the IRS related to processing amended returns based on corrected Schedules K-1."

Of course, Rev. Proc. 2019-32 did not provide relief for partnerships that discovered the need for adjustments later on in the year, or perhaps even a year later. Those BBA partnerships, without an administrative mechanism to file amended returns, would have had to file AARs, and some did. Then came a pandemic.

Rev. Proc. 2020-23 and partnership amended returns

In Rev. Proc. 2020-23, the IRS granted relief to enable BBA partnerships to file amended returns for 2018 and 2019 by Sept. 30, 2020, rather than having to rely on AARs. More specifically, BBA partnerships can file amended returns for tax years beginning in 2018 or 2019 (if Forms 1065 and Schedules K-1 were already filed), using Form 1065 with the "amended return" box checked, and issue amended Schedules K-1 to partners.

The IRS's decision was clearly in response to the retroactive, tax-favorable provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, which, but for procedural filing relief, would have required BBA partnerships to file AARs. The relief from having to use AARs was necessary because otherwise the benefits of the CARES Act provisions, even if applicable, would only be recognized in the partners' 2020 tax year.

The IRS recognized this dilemma in promulgating Rev. Proc. 2020-23:

Without the option to file amended returns . . . BBA partnerships that already filed their Forms 1065 for the affected years generally are unable to take advantage of the CARES Act relief for partnerships except by filing [AARs] pursuant to section 6227. Filing an AAR would result in the partners' only being able to receive any benefits from that relief on the current taxable year's federal income tax return. Thus, if an AAR were filed, the partners generally would not be able to take advantage of CARES Act benefits from an AAR until they file their current year returns, which could be in 2021. [Rev. Proc. 2020-23, §2.04.]

Importantly, Rev. Proc. 2020-23 permits the amended returns for 2018 and 2019 to take into account tax changes brought about by the CARES Act as well as "any other tax attributes to which the partnership is entitled by law" (§3.02). While not going so far as to extend the time for filing superseding returns, Rev. Proc. 2020-23 generally enables BBA partnerships to avoid having to rely on an AAR to make an adjustment to a previously filed Form 1065 or Schedule K-1 for 2018 and/or 2019.

If the partnership has already filed an AAR for 2018 or 2019, the amended partnership return "replaces" a previously filed AAR. Section 4.03 of Rev. Proc. 2020-23 says partnerships "should use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return."

What does this mean for the BBA?

While the IRS has, for another year, relaxed the AAR rules, this does not mean that the rest of the BBA procedures are inapplicable — in fact, quite the opposite. Rev. Proc. 2020-23, Section 2.05, explains that "[a] BBA partnership that files an amended return pursuant to this revenue procedure is still subject to the centralized partnership audit procedures enacted by the BBA."

This also means that the consistency rule of Sec. 6222 is still in effect. Section 3.03 of Rev. Proc. 2020-23 states that "[f]or purposes of Section 6222, the amended return replaces any prior return (including an AAR filed by the partnership) for the taxable year for purposes of determining the partnership's treatment of partnership-related items" (emphasis added).

If the consistency rule of Sec. 6222 is still in effect after a partnership files an amended return, then a partner would appear to be obligated to ensure that his or her own return is (still) consistent with the amended Form 1065. While nothing in the Code requires a taxpayer to amend a tax return once it is filed, the failure to do so under the BBA puts the partner at risk of the IRS's exercising its math error/computation adjustment authority to enforce consistency. Partnerships and partners should plan accordingly, especially taking into account state tax compliance, which could greatly increase the number of amended returns required to be filed by a partner.

Other considerations

Partnerships and partners need to also think practically about how the current state of tax administration will impact their ability to claim refunds from tax provisions contained in the CARES Act.

Individual taxpayers filing amended returns on Form 1040-X, Amended U.S. Individual Income Tax Return, must do so on paper. There is currently no ability to file such forms electronically. IRS service centers have been significantly impacted by the pandemic, and processing times for paper-filed amended returns are long. An amended return may also trigger an examination subject to review by the Joint Committee on Taxation (JCT) should the claim exceed the statutory refund amount in Sec. 6405.

Example: Partnership A wants to adjust its 2018 Form 1065 to claim certain energy credits renewed by the Further Consolidated Appropriations Act, 2020, P.L. 116-94, and to claim bonus depreciation on qualified improvement property (QIP) by the CARES Act. Partnership A may file an AAR, the benefit to which will be applied as additional reporting-year tax by the partners in the 2020 tax year, to be claimed, potentially, as a refund in 2021. Recall that each partner will have to have sufficient taxable income or estimated tax paid to obtain the full benefit of the adjustment in 2018. Each partner will also have to comply with the complex BBA regulations to ensure that adjustments are made properly for 2018 and in the subsequent 2019 year.

Assuming Partnership A meets the requirements of Rev. Proc. 2020-23, it may also amend its 2018 return and furnish amended Schedules K-1, leaving the partners to amend their own 2018 returns. Amending a tax return is nothing new but likely will have state tax compliance considerations as well. It may also take time to receive a refund if the claim is filed on paper. If the adjustment results in a loss that may be carried back, then the partners will also have to take into account the net operating loss (NOL) carryback rules of the CARES Act and Sec. 6411, as well as the IRS's extended tentative refund due dates in Notice 2020-26, and the accompanying fax procedures. If the partner ended up with an NOL in 2018 that it wished to carry back to claim a tentative refund, the due date under Notice 2020-26 is June 30, 2020. That also requires a partnership to consider the timing of the amended return, which is now potentially significantly accelerated.

Partnership A could also potentially split up the adjustments by filing an accounting method change for the QIP deduction in 2019 and then determining whether to file an AAR or amended return, considering the pros and cons of each.

What's next?

BBA partnerships may have an opportunity for 2018 and possibly 2019 to sidestep the AAR process through Rev. Proc. 2020-23 and go back to the days of filing an amended return, furnishing amended Schedules K-1, and having partners seek refunds through their own amended filings. It is unclear whether more permanent changes to the AAR process are in store for partnerships, though it would appear that the IRS has that authority by virtue of Congress's grant under Sec. 6031(b)(4). Until that time comes, if it does, BBA partnerships have a limited reprieve from filing AARs.

The bigger question for partnerships, however, is whether an amended return, even if administratively simpler, ultimately provides a benefit to the partners. Timing considerations, the amount and manner in which the claim is filed, and the potential for an NOL all may encourage a greater analysis of the nature of the partnership's claim and whether an AAR is truly a better idea than an amended return.



Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Shamik Trivedi, J.D., LL.M., is a senior manager, IRS practice, procedure, and regulatory services, in the National Tax Office of Grant Thornton LLP in Washington. Mr. Trivedi is a member of the AICPA IRS Advocacy and Relations Committee. For more information on this article, contact

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