The IRS issued final regulations that provide an exception from the centralized partnership audit regime for certain partnership-related items (T.D. 9969). The partnership items to which the exception applies are those that involve a "special enforcement matter" as defined in the regulations. The regulations also provide alternative rules for examinations of those excepted items and address imputed underpayments that result from centralized audit regime adjustments. The final regulations overall follow the November 2020 proposed regulations (REG-123652-18), with a few revisions made in response to public comments.
Exceptions for special enforcement matters
Under Sec. 6241(11), the IRS can issue regulations providing that the centralized audit regime does not apply to partnership-related items involving special enforcement matters. One such matter concerns certain situations in which an adjustment during an examination of a person other than the partnership requires a change to a partnership-related item. The final regulations, issued Friday, provide that the IRS may determine that the centralized partnership audit regime does not apply to adjustments to partnership-related items when each the following conditions is met:
- A person other than the partnership must be under examination;
- The IRS must propose an adjustment to an item that is not a partnership-related item;
- A partnership-related item must be a component of that item that is not a partnership-related item;
- Determinations about that partnership-related item must be needed in order to adjust the item that is not a partnership-related item; and
- The treatment on the partnership's return of the partnership-related item that is the component of the item that is not a partnership-related item being adjusted must be based, in whole or in part, on information provided by the person under examination.
In response to a comment and to avoid any confusion, the IRS said it modified Regs. Sec. 301.6241-7(b)(1)(iii) to clarify that the information provided by the partner that forms the basis of the reporting by the partnership must come from the partner's own books and records, not the books and records of the partnership.
The second special enforcement matter concerns situations when a qualified Subchapter S subsidiary (QSub) is a partner in a partnership. Regs. Sec. 301.6221(b)-1 provides rules for electing out of the centralized partnership audit regime for partnerships with fewer than 100 partners, including determining whether a partnership is eligible to elect out of the centralized partnership audit regime. A partnership can elect out if it has 100 or fewer partners for the tax year; each partner is an eligible partner; the election is made timely; and the partnership notifies its partners of the election.
The regulations provide that a partnership with a QSub as a partner cannot elect out of the centralized partnership audit regime. The IRS said in the preamble that this avoids having more than 100 partners to audit, which could happen if QSubs are permitted to elect out.
When the IRS adjusts a partnership's taxes, penalties, additions to tax, or other amounts under the centralized partnership audit regime, there has to be a way to include these amounts in the imputed underpayment and to account for these amounts if the partnership elects to push out the adjustments to the partners under Sec. 6226. There must also be a mechanism to account for any adjustments to a previously determined imputed underpayment. The final regulations provide rules that apply to the calculation of the imputed underpayment during an IRS examination and to adjustments to the imputed underpayment as calculated by the partnership.
The final regulations went into effect on Dec. 9, 2022.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.