IRS Issues Temporary Regulations on Early Elections of New Partnership Audit Procedures

On Thursday, the IRS issued temporary regulations governing elections to have the newly enacted partnership audit procedures apply to certain tax years beginning before Jan. 1, 2018 (T.D. 9780). The rules permit the election to made before Jan. 1, 2018, by partnerships that have received notices of selection for examination of the partnership for that tax year. Those partnerships must make the election to have the new audit procedures apply within 30 days of the date of notification. Any election made under this provision must contain certain information, which is discussed below.

The Bipartisan Budget Act (BBA) of 2015, P.L. 114-74, repealed the TEFRA rules governing partnership audits that had been in effect since 1982 and replaced them with a new centralized partnership audit regime that generally assesses and collects tax at the partnership level. It also replaced the rules that applied to electing large partnerships with these new rules. The new rules apply to partnership tax years beginning after Dec. 31, 2017. Partnerships can elect to have some of the new rules apply for tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018, and the rules issued today govern the time, manner, and form of making this election.

The election may be revoked only with the IRS’s consent, and a taxpayer cannot request an extension of time for making the election under Regs. Sec. 301.9100-3. An election will not be valid if it frustrates the purposes of Section 1101 of the BBA (Temp. Regs. Sec. 301.9100-22T(a)).

Partnerships selected for audit that wish to make the election must file a statement with the words “Election under Section 1101(g)(4)” written at the top and send it to the individual identified in the notice of selection for examination as the IRS contact person. The statement must be in writing and dated and signed by the tax matters partner, as defined under Sec. 6231(a)(7) (of the TEFRA rules), and the regulations, or by an individual who has authority to sign the partnership return for the tax year under Sec. 6063, the regulations, and any applicable forms and instructions. An individual’s dating and signing this election statement is prima facie evidence that the individual is authorized to make the election on the partnership’s behalf.

The statement must include:

• The partnership’s name, taxpayer identification number (TIN), and the partnership tax year for which the election is being made;
• The name, TIN, address, and daytime telephone number of the individual who signs the statement;
• Language indicating that the partnership is electing for Sec. 1101(c) to apply for the partnership return for the tax year in the notice of selection for examination;
• The information required to properly designate the partnership representative under new Sec. 6223, including the name, TIN, address, telephone number, and any additional information the IRS requires;
• Representations that the partnership is not insolvent and does not reasonably anticipate becoming insolvent before the matters under audit are resolved;
• Representations that the partnership has not filed, and does not reasonably anticipate filing or having filed, a voluntarily or involuntary bankruptcy petition under Chapter 11; and
• Representations that the partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay any potential imputed underpayment for the partnership tax year under audit.

This statement must be signed, with a penalties of perjury statement at the end, by the individual who is duly authorized to make the election (Temp. Regs. Sec. 301.9100-22T(b)).

The temporary regulations also provide an exception to the general rule that only partnerships that have received a notice of selection for examination may elect into the new partnership audit regime. Partnerships that have not received a notice of selection that wish to file an administrative adjustment request under Sec. 6227 may also elect into the new regime; however, partnerships not selected for audit cannot make the election before Jan. 1, 2018 (Temp. Regs. Sec. 301.9100-22T(c)).

Identical proposed regulations open to comment were issued at the same time (REG-105005-16).

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.