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The Internal Revenue Service is drafting additional proposed regulations to implement the new regime for auditing partnerships, an agency official said.
The rules would follow a proposal (REG-136118-15) issued earlier this year. The agency is still grappling with how tax-exempt partners should be treated when a partnership owes more tax at the conclusion of an audit, Clifford Warren, IRS senior counsel to the associate chief counsel (Passthroughs and Special Industries), said Sept. 15.
“It feels awkward to have a tax-exempt partner paying someone else’s taxes,” Warren said at the American Bar Association tax section meeting in Austin, Texas.
The government is also actively working on appeals procedures that partnerships can use during an audit.
“The vision right now is there will be an opportunity to go to appeals during a BBA audit,” said Brendan O’Dell, an attorney-adviser in the Treasury Department’s Office of Tax Policy. “The question that we are struggling with—or just working through because it’s new—is what that will look like, when in the process do you go to appeals, what are the issues that are brought before appeals.” O’Dell’s comments should ease the concern of some practitioners who previously told Bloomberg BNA they were alarmed that the proposed regulations made no mention of an appeals process.
The new auditing regime, enacted by the Bipartisan Budget Act of 2015, goes into effect Jan. 1, 2018. A public hearing on the proposed regulations is scheduled for Sept. 18.
Warren said many divisions within the chief counsel’s office are working to resolve questions about how to implement the new auditing regime, which allows the IRS to collect unpaid tax at the entity level.
One of those questions involves a partnership’s ability to change its partnership representative, who represents the entity in proceedings with the IRS.
The proposed regulations provide that a partnership representative designation may not be changed—either by resignation or revocation—until the IRS issues a notice of administrative proceeding to the partnership, except when the partnership files a valid administrative adjustment request. The form used for filing an AAR may not be used solely for the purpose of changing the representative.
In the case of a revocation, the partnership must notify the IRS in writing and must also notify the representative. A revocation is effective 30 days after the date the notice of revocation is sent to the IRS.
“I think we need to go back and sort of rethink—in light of the comments—the timing” for changing a partnership representative, said Rochelle Hodes, associate tax legislative counsel in Treasury’s Office of Tax Policy.
Members of industry have expressed concern over not having the ability to revoke a partnership representative designation prior to the partnership receiving a notice of administrative proceeding. They have also voiced concern over the 30-day window, which may give a disgruntled representative time to make decisions that could hurt the partnership.
“We’ve heard this loud and clear,” Hodes said.
Government officials also addressed questions on tiered partnerships and the ability to make a push-out election, which under the rules, allows a partnership to transfer tax liability to individual partners.
Tax accountants and lawyers have been pushing for regulations or technical corrections to the BBA that would allow tax adjustments to be pushed out to the final partner in a tiered partnership.
“As you get up the tiers it becomes much more complex for the IRS to go out and find the ultimate partner,” Hodes said. That, in turn, makes it difficult for them to collect all of the taxes that are owed, she said.
O’Dell said the government has received a lot of interesting suggestions on mechanisms to make a tiered push-out work and those are carefully being considered.
A technical corrections bill that would address that issue and other industry concerns was introduced in the last session of Congress by top tax-writers but has yet to be reintroduced this year. Practitioners hoped the bill could be attached to a broader tax reform package, but it’s unclear whether legislation will be passed this year before the new audit regime goes into effect.
O’Dell said that the government is aware there’s a timing mismatch between the time period in which a partnership may request to make modifications to an imputed underpayment and when the IRS determines a partnership’s final tax adjustment.
Under the BBA, a partnership has 270 days from the date of receiving a notice of proposed partnership adjustment to make a request to modify an imputed underpayment and submit supporting documentation.
“When that clocks over, there’s some additional time for the IRS to do the final partnership adjustment,” O’Dell told Bloomberg BNA after a panel.
Because of that timing mismatch, a partnership may request to make modifications but may still want to go to the U.S. Tax Court to fight over the final adjustments, he said.
One of the ways an imputed underpayment can be reduced is by having the reviewed-year partners file amended returns, which costs money, he pointed out. Thus, a partner may pay money based on an adjustment that could later be disputed in court, he said.
“That mismatch is also something we’re thinking about,” O’Dell said.
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