Sec. 6603 deposits under the BBA audit regime

Editor: Rochelle Hodes, J.D., LL.M.

When resolving disputes with the IRS over substantive tax issues, clients need to be informed regarding the continued accrual of interest on an underpayment during the controversy and the ability to stop the running of interest. With the IRS noncorporate interest rates under Sec. 6621 having increased from 3% in 2020 to 8% in early 2024, interest has become a much more material consideration. 

There are important distinctions between deposits and tax payments (see Keenan, Cooper, and Abney, “Analyzing the Difference Between Tax Payments and Deposits,” 53-3 The Tax Adviser 9 (March 2022)). For instance, a deposit suspends the accrual of underpayment interest on disputed tax amounts but does not constitute a payment, while a tax payment stops further interest accrual but starts the statute of limitation for any refund claim. A taxpayer will receive a refund only if they prove that more tax was paid than was owed. Additionally, taxpayers can request the return of a deposit in writing, and the IRS must return the deposit with interest, provided the requirements noted below are met (Sec. 6603(c); see Rev. Proc. 2005-18, §6). 

The centralized partnership audit regime of the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, implemented the deposit procedures noted above, but with an added layer of complexity and several nuances, as set forth below. 

Overview of the BBA centralized partnership audit regime 

The BBA audit regime refers to the audit and tax collection procedures for partnerships the act introduced, which replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248, partnership audit rules. Some key aspects of the BBA centralized partnership audit regime are: 

• It generally applies to partnerships for tax years beginning on or after Jan. 1, 2018 (BBA §1101(g)(1); for partnership tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018, partnerships had the option to elect into it (see BBA §1101(g)(4)). 
• It establishes a centralized partnership audit regime where the IRS assesses and collects any underpayment of taxes, called an “imputed underpayment,” directly from the partnership rather than the partners (see Sec. 6221(a)). 
• Partnerships must designate a partnership representative, who will act as the point of contact for any BBA audits and is the sole person who can bind the partnership and all partners (Sec. 6223(a)). 
• Partnerships have the option to “push out” any audit adjustments to the partners rather than paying the imputed underpayment at the partnership level (Sec. 6226(a)). 
• A correction by the partnership of one or more partnership-related items for any partnership tax year is done through a request for an administrative adjustment instead of an amended return (Sec. 6227(a)). 

Regulations and interim guidance have been issued providing more details on filing requirements, the audit process, modifications, assessment, and collection under the BBA centralized partnership audit regime (see also Brody and Nelson, “What Accountants Need to Know About the BBA,” 55-4 The Tax Adviser 38 (April 2024)). 

The calculation of interest on imputed underpayments for partnerships involves a two-step process as delineated in Secs. 6233(a) and (b), respectively. These sections specify how interest accrues both from the reviewed year and with respect to the adjustment-year return. 

In the first step of the process, interest is determined with regard to the reviewed year (Sec. 6233(a)). The reviewed year refers to the partnership tax year under examination and to which the item being adjusted relates. Interest is calculated from the day after the due date for filing the partnership return for the reviewed year until the due date for the partnership return for the adjustment year, or until the imputed underpayment is paid, if that happens earlier. Interest imposed on an imputed underpayment resulting from partnership adjustments for the reviewed year mirrors the interest that would be imposed under Chapter 67 of the Internal Revenue Code if the imputed underpayment were treated as an underpayment of tax for the reviewed year (Regs. Sec. 301.6233(a)-1(b)). 

In the second step, interest keeps accruing with respect to any imputed underpayment not paid on the date prescribed (Sec. 6233(b)). Interest in this step is calculated as if the imputed underpayment were an actual underpayment of tax imposed in the adjustment year. The adjustment year refers to the partnership tax year in which the adjustment becomes final. An adjustment becomes final in the year in which a court decision becomes final; the year in which an administrative adjustment request is made; or, in any other case, the year in which the Notice of Final Partnership Adjustment is mailed (Sec. 6225(d)(2); Regs. Sec. 301.6241-1(a)(1)). 

The interest rate applicable to imputed underpayments is primarily governed by Sec. 6621(a)(2), which establishes the general underpayment rate. 

Two percentage points over the normal underpayment interest rate in Sec. 6221(a)(2) are charged with respect to tax the partners owe if the partnership opts for the push-out election under Sec. 6226. The push-out election involves allocating the adjustments to the reviewed-year partners and having those partners pay the tax attributable to taking those adjustments into account. Under this election, interest is determined at the partner level and is calculated from the due date of the return for the relevant tax year to which the increase in tax is attributable until the tax is paid. 

Deposits vs. tax payments 

Under Sec. 6233(a)(2), the interest on the partnership imputed underpayment runs from the due date of the reviewed-year return to the due date of the adjustment-year returns or, if earlier, the date that the payment of the imputed underpayment is made. This contemplates that the partnership can make an advance payment of the imputed underpayment to suspend the interest from running. Additionally, Sec. 6233(c) cross-references Sec. 6603 with respect to deposits to suspend the running of interest. In practice, questions exist as to how to designate a remittance as a deposit to ensure the suspension, or a return of the deposit (with interest) if the ultimate liability owed is less than the deposited amount.

Advance payment of imputed underpayments 

Before the American Jobs Creation Act of 2004, P.L. 108-357, uncertainty surrounded the categorization of remittances as either tax deposits or payments. However, with the enactment of Sec. 6603 (by act §842(a)) and the issuance of Rev. Proc. 2005-18, much-needed clarity was added. Under these authorities, a deposit refunded to the taxpayer is considered an overpayment, thereby accruing interest, to the extent that it pertains to a disputed tax liability. Crucially, the taxpayer must provide a written statement that describes the basis for the taxpayer’s belief that it has a reasonable basis for its treatment of a disputed item and that the IRS has a reasonable basis for disallowing said treatment (Rev. Proc. 2005-18, §7). 

Nuances exist between the statutory provisions addressing an advance payment of an imputed underpayment by an audited partnership versus a deposit under Sec. 6603 for a potential underpayment. Sec. 6233(c) states: “For rules allowing deposits to suspend running of interest on potential underpayments, see section 6603.” Sec. 6603(a) lists “any tax imposed under subtitle A or B or chapter 41, 42, 43, or 44” as the taxes to which it applies. Even though the imputed underpayment is imposed under

Subtitle F, Chapter 63 — which is not one of the authorities in Sec. 6603(a) — Sec. 6232(a) specifies that the imputed underpayment is treated as a tax imposed under Subtitle A. 

In light of the incorporation of Sec. 6603 in Sec. 6233(c), deposits in general, including the return of deposits with interest, appear applicable if the disputable-tax requisite under Sec. 6603(d) is satisfied. Still, the procedures described below on the IRS website only provide for Sec. 6603 deposit treatment for partners, as opposed to partnerships, for which only an advance payment procedure is enumerated. Accordingly, tax advisers should exercise caution when advising a client that a return of the deposit, with payment of interest, is certain. 

Redesignation of a partnership deposit after a push-out election 

A person making a deposit may elect in writing to have the deposit applied against other assessed or unassessed liabilities to the extent the deposit exceeds the amount ultimately determined to be due (Rev. Proc. 2005-18, §4.01(2)), but Rev. Proc. 2005-18 does not allow the taxpayer to direct the IRS to apply a deposit to pay another taxpayer’s liability (see IRS Legal Advice Issued by Field Attorneys 20171801F). 

Neither the BBA partnership audit provisions nor Sec. 6603 provides for a transfer of deposits from the partnership level to the partner level in the case of a push-out election. Consequently, if making a deposit at the partnership level, be sure that a pushout election will not be chosen. Absent further guidance, there is no certainty that (1) the partnership-level deposit would be applied to the liability of the partners if there is a push-out election, or (2) the return of the deposit from the partnership would be treated as a disputable tax under Sec. 6603(d) if the liability had been pushed out. 

Rather, if the partnership representative is certain to opt for the push-out election, the deposit should be made on behalf of the partners. In making this decision, all facts and circumstances should be considered. As noted above, 2 percentage points of interest over the normal underpayment interest rate are charged on any tax owed by the partners under a push-out. (In a multitiered partnership, knowing who will pay in the event of a push-out election may be problematic, since each upper-tier partnership makes its own push-out election.) On the other hand, interest on imputed underpayments at the partnership level begins to run on the day after the due date of the partnership return, which may be years before the flowthrough tax consequences to a partner, depending on partner-specific attributes, such as carryforwards. This could result in much more interest at the partnership level than the additional 2 percentage points of interest for partners on a push-out. 

Procedure for a deposit under Sec. 6603 by partner 

The IRS webpage “BBA Partnership Audit Process” provides specific guidance for how partners of BBA-audited partnerships that are disputing the partnership adjustments and/or imputed underpayment amount may make Sec. 6603 deposits: 

• The partner can transmit a deposit by sending a check or money order along with a written statement to the relevant Internal Revenue Service Center where the partnership’s return is filed or to the appropriate office handling the examination of the partnership’s return. 
• A written statement accompanying the deposit must designate the remittance as a deposit and include: 
• The name and taxpayer identification number of the partnership under examination; 
• The reviewed year of the partnership under examination; 
• The audit control number assigned to the partnership under examination; 
• A statement that identifies the amount of the disputable tax of the partnership being audited (for example, if the partnership requested appeal, including the 30-day letter; if the partnership has petitioned a court, including the case docket number; or, if the partnership plans to petition a court, a copy of the Notice of Proposed Partnership Adjustment or Final Partnership Adjustment); and 
• The partner’s estimated share of the adjustments and the corresponding tax, interest, and penalty calculations, which represent the amount of payment being made. 

The deposit serves as a mechanism for the partner to temporarily suspend the accrual of interest on potential underpayments while the partnership adjustments and disputes are being addressed. This allows the partnership time to resolve the issues without the partner incurring additional interest charges if all or a portion of the adjustments are sustained through the conclusion of the controversy. 

In essence, making a deposit under Sec. 6603 provides a way for partners of BBA-audited partnerships to manage their potential tax liability during the audit process, particularly when disputes arise regarding adjustments made by the IRS. This is particularly relevant for partnerships with few partners. Partners, or indirect partners, of larger partnerships may not be aware of an examination, as partnership agreements may differ regarding requiring such communications. Particularly in complex, multitiered entities, the ultimate taxpaying partners may remain unaware of audits or any resulting adjustments until they receive push-out statements post-controversy resolution. Consequently, partners may find themselves uninformed about both the existence of a controversy and the opportunity to make a deposit. 

In contrast, the IRS website does not explicitly contemplate Sec. 6603 deposits being made at the partnership level for imputed underpayments. Rather, the IRS BBA partnership webpage sets forth the procedure of an advance BBA exam imputed underpayment where a push-out election is not made by the partnership payment prior to assessment. 

Some clarity; challenges remain

In conclusion, the intricate interplay between the BBA audit regime and the provisions on deposit and tax payment underscores the necessity for meticulous analysis on the part of both partnership representatives and advisers. While Sec. 6603 and Rev. Proc. 2005-18 have significantly clarified the treatment of remittances, challenges persist in determining the precise applicability of deposits in the BBA audit regime. The inherent ambiguity surrounding the treatment of deposits in relation to push-out elections further complicates matters, emphasizing the importance of thoughtful consideration before making a deposit. It is important to evaluate whether the imputed underpayment will be paid by the partnership or the adjustments will be pushed out to the partners, in order to determine the appropriate entity to make any preassessment remittances. 

Contributors 

Cory Stigile, CPA, J.D., LL.M., is a principal, and Philipp Behrendt, Esq., LL.M., is an associate attorney, both with Hochman Salkin Toscher Perez, P.C., in Beverly Hills, Calif. Rochelle Hodes, J.D., LL.M., is a principal with Washington National Tax, Crowe LLP, in Washington, D.C. Stigile is a member, and Hodes is chair, of the AICPA IRS Advocacy & Relations Committee. For questions about this column, contact thetaxadviser@aicpa.org.