Editor: Alex J. Brosseau, CPA
As part of the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, Congress enacted a new statutory regime for auditing, adjusting, assessing, and collecting tax from all partnerships. Under the BBA procedures, the IRS generally will examine partnership-related items and assess any tax resulting from the examination (the "imputed underpayment") at the partnership level. The BBA and the regulations thereunder do not provide an explicit right to challenge adjustments proposed by the IRS before the IRS Independent Office of Appeals (Appeals).
Recently, the IRS published two memoranda that clarify how it will implement the BBA procedures, including appeal rights. The first memorandum, dated Oct. 18, 2019, directs Appeals employees on how to handle cases arising under the BBA procedures (Memorandum for Appeals Employees, No. AP-08-1019-0013 (Oct. 18, 2019), available at www.irs.gov (the Appeals Memo). The second memorandum, dated Oct. 24, 2019, provides Large Business and International Division (LB&I) and Small Business/Self-Employed Division (SB/SE) frontline managers and examiners with field examination procedures, processes, and guidelines (Interim Guidance Memorandum, LB&I-04-1019-010 (Oct. 24, 2019), available at www.irs.gov (the LB&I and SB/SE Memo). This discussion focuses on the role of Appeals in BBA cases, as clarified by the Appeals Memo and the LB&I and SB/SE Memo. (The LB&I and SB/SE Memo also provides guidance regarding the implementation of the BBA procedures at the examination level. That guidance is beyond the scope of this column.)
The BBA procedures are effective for all partnership returns with tax years beginning after Dec. 31, 2017, unless the partnership is eligible to and elects out of the BBA Procedures (Regs. Sec. 301.6221(a)-1(c)(1)). Partnerships with tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018, can elect into the BBA procedures by filing Form 7036, Election Under Section 1101(g)(4) of the Bipartisan Budget Act of 2015, within 30 days of receiving a Letter 2205-D (Regs. Sec. 301.6221(a)-1(c)(2)).
Only partnerships with 100 or fewer eligible partners — and no ineligible partners — can elect out of the BBA procedures (Regs. Sec. 301.6221(b)-1(b)(1)). An eligible partner is a partner that is either an individual, a domestic entity classified as a C corporation, a foreign entity that would be classified as a C corporation, an S corporation, or an estate of a deceased partner (Regs. Sec. 301.6221(b)-1(b)(3)). The election out of the BBA procedures can only be made on the partnership's timely filed return, including extensions, and is deemed valid unless the IRS determines that it is invalid (Regs. Sec. 301.6221(b)-1(c)(1)). The LB&I and SB/SE Memo clarifies that the determination that an election out of the BBA procedures is invalid cannot be contested in Appeals (see LB&I and SB/SE Memo, at 23).
Once a partnership elects out of the BBA procedures, the election cannot be revoked without the IRS's consent (Regs. Sec. 301.6221(b)-1(c)(1)). A request to revoke the election out of the BBA procedures must be made within the first 30 days after the partnership receives a notice of selection for examination (Letter 2205-D) (see LB&I and SB/SE Memo, at 23). The denial of a request to revoke an election out of the BBA procedures also cannot be contested in Appeals (id. at 24).
As noted above, under the BBA procedures, the examination of the partnership takes place at the partnership level. Any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year, and any partner's distributive share thereof, generally are determined at the partnership level. In addition, any tax attributable to these items generally is assessed and collected at the partnership level. The applicability of any penalty, addition to tax, or additional amount that relates to an adjustment of any item of income, gain, loss, deduction, or credit of a partnership for a partnership tax year or to any partner's distributive share thereof also is determined at the partnership level. An underpayment of tax determined as a result of an examination of a tax year is imputed to the year during which the adjustment is finally determined and generally is assessed against and collected from the partnership with respect to that year rather than the reviewed year.
For purposes of the BBA procedures, the partnership representative (PR) acts on behalf of the partnership and partners (Sec. 6223(a)). The PR has the sole authority to act on behalf of the partnership. Under the BBA procedures, the partnership and all partners of the partnership are bound by actions taken by the partnership (Sec. 6223(b)). Thus, for example, partners may not participate in or contest results of an examination of a partnership nor participate in the Appeals process.
Appeals consideration of BBA cases
The Appeals Memo clarifies that Appeals hears disputes in three types of BBA cases:
- BBA cases with adjustments (the examiner mailed a 30-day letter and the BBA entity disputes the audit issues by protesting to Appeals);
- BBA modification disputes; and
- Docketed BBA cases (cases are docketed only after a Notice of Final Partnership Adjustment is issued and the PR petitions the courts) (Appeals Memo, at 4-5).
The Appeals Memo attaches Draft Internal Revenue Manual (IRM) Section 8.19.14. Under the IRM provisions, early elect-in BBA cases are handled under the same Appeals procedures as all other BBA cases (Draft IRM §126.96.36.199.4(4)). Additionally, BBA procedures are an "appeals coordinated issue," meaning that Appeals officers must make a referral for technical assistance on every BBA procedures case (Draft IRM §188.8.131.52.2).
Below is an overview of the first two types of appealable disputes; the procedures for docketed BBA cases have not yet been finalized (see Draft IRM §184.108.40.206.4(5)).
BBA cases with adjustments
In unagreed cases, the examiner will issue a Letter 5891, 30-Day Letter — Bipartisan Budget Act Partnership (the BBA 30-day letter), attaching a summary report as well as a draft Notice of Proposed Partnership Adjustment (NOPPA). The NOPPA reflects the adjustments to the partnership-related items and computes an imputed underpayment amount if any exists (see LB&I and SB/SE Memo, at 63; Draft IRM §220.127.116.11.5).
After receiving the BBA 30-day letter, the PR can protest the examiner's determinations by timely submitting a written Appeals protest (see LB&I and SB/SE Memo, at 63). If less than 18 months remain before the end of the applicable period of limitation, the IRS will require the PR to execute a Form 872-M, BBA Consent to Extend Time for Making Adjustments to Partnership-Related Items (id.).
Appeals will only consider substantive issues, such as challenges to the partnership adjustments, the computation of the imputed underpayment, and the imposition of penalties (including any partnership-level defenses to such penalties) (Draft IRM §18.104.22.168.7).
If, in response to the partnership's filing of an administrative adjustment request (AAR), the IRS begins a BBA partnership proceeding, the issues raised in the AAR will be considered along with any other issues raised during the proceeding (LB&I and SB/SE Memo, at 37).
An Appeals conference will generally be offered in the Appeals Office servicing the area where the partnership has its principal place of business (Draft IRM §22.214.171.124.6(3)). The Appeals technical employee will attempt to enter into a binding settlement agreement with the PR on the treatment of partnership-related items (Draft IRM §126.96.36.199.6(4)).
Whether or not a settlement is reached, Appeals will issue the final NOPPA to the partnership and the PR by certified mail (if the case is not under the jurisdiction of Appeals, the final NOPPA is issued by Technical Services (see LB&I and SB/SE Memo, at 64)). The mailing of the NOPPA to the partnership and PR starts the 270-day window for the PR to submit a request to modify any imputed underpayment amount reflected on the NOPPA (Regs. Secs. 301.6225-2(a) and 301.6225-2(c)(3)). The NOPPA may not be mailed more than three years after the later of (1) the date on which the partnership return for the tax year was filed; (2) the return due date for the tax year; or (3) the date on which the partnership filed an AAR with respect to the tax year (Sec. 6235(a)(1); Draft IRM §188.8.131.52.3(3)). The PR can extend this period by executing a Form 872-M (Draft IRM §184.108.40.206.3(3)).
BBA modification disputes
Partnerships can request that the proposed imputed underpayment be modified to more accurately reflect the actual amount of the tax underpayment resulting from the adjustment of partnership-related items, considering the specific circumstances of the reviewed-year partners (Sec. 6225(c)(2)(A)). To accomplish this, the regulations provide several modification procedures (Regs. Sec. 301.6225-2(d)). Unless forms, instructions, or other guidance provide otherwise, a partner cannot raise a partner-level defense to penalties through the modification procedures (Regs. Sec. 301.6225-2(d)(2)(viii)).
To request a modification, the PR must fax, or submit electronically when the electronic portal is completed, a Form 8980, Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c), to the Ogden BBA Unit that houses the administrative file after the issuance of the NOPPA (Draft IRM §220.127.116.11(1)). After evaluating all the documents provided by the PR, the Ogden BBA Unit will issue a Form 15027, Partnership Summary of Approved Modifications and the Imputed Underpayments, to the partnership and PR detailing the approved modifications and a revised imputed underpayment amount (Draft IRM §18.104.22.168(2)).
If the PR does not agree to the revised imputed underpayment on Form 15027, the PR may request that Appeals hear the matter (Draft IRM §22.214.171.124(3)). The procedures for contesting modification request denials have not yet been finalized (Draft IRM §126.96.36.199.3).
If a case is returned to Appeals for a hearing on a modification issue, Appeals will not consider previously decided matters, such as the determination of the partnership adjustments, the computation of the imputed underpayment, or the imposition of penalties. These issues must be addressed before the issuance of the final NOPPA. Appeals will hear the unagreed modification items only (Draft IRM §188.8.131.52.7).
Closing unagreed cases
After Appeals resolves any modification disputes, the BBA Ogden Unit will issue a Notice of Final Partnership Adjustment (FPA) to the partnership and the PR (Draft IRM §184.108.40.206). However, if there is insufficient time left on the period of limitation on assessment, the Appeals technical employee will issue the FPA (Draft IRM §220.127.116.11.8). A partnership has 90 days after the date that the FPA is mailed to file a petition in the U.S. Tax Court, a federal district court, or the Court of Federal Claims (Sec. 6234(a)).
The IRS's issuance of the two internal memoranda provides insight into how Appeals will handle future disputes under the new partnership audit regime. Appeals will be able to review both a substantive BBA partnership adjustment dispute and a BBA modification dispute concerning the same matter, but the substantive BBA partnership adjustment dispute will be resolved by Appeals before issuance of the NOPPA while any BBA modification dispute will be heard by Appeals after the issuance of the NOPPA.
Alex J. Brosseau, CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.
For additional information about these items, contact Mr. Brosseau at 202-661-4532 or email@example.com.
Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.
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