The IRS should provide a simplified adjustment procedure for partnership audits, the AICPA recommended in a letter to the IRS Chief Counsel’s Office on Wednesday, and should generally aim for maximum flexibility in adjusting the tax attributes of an audited partnership and its partners.
The letter, from AICPA Tax Executive Committee Chair Annette Nellen, made six recommendations regarding the new centralized partnership audit regime, which was enacted by the Bipartisan Budget Act of 2015, P.L. 114-74, and amended by the Protecting Americans From Tax Hikes Act of 2015, P.L. 114-113, to replace the former partnership audit procedures implemented by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248. Under the new audit regime, tax is generally determined, assessed, and collected at the partnership level.
The IRS issued proposed regulations in February (REG-118067-17) that provide rules on how and when partnerships and their partners adjust tax attributes to reflect adjustments made in a partnership audit. Under the centralized partnership audit regime, a partnership is generally liable for the net increase in tax (or “imputed underpayment”) that results from the adjustments made to partnership items during the year under audit. Under the proposed regulations, the partnership’s payment of this imputed underpayment requires partners to adjust various tax attributes, which the proposed regulations list.
The AICPA’s letter recommended that the IRS should:
- Provide a flexible procedure for applying audit adjustments to the tax attributes of audited partnerships and their partners.
- Provide audited partnerships an elective “simplified tax attribute adjustment procedure” (STAAP) under certain conditions. Only partnerships that accept limitations on the type of Sec. 6225 modifications that could reduce their imputed underpayment would qualify for the STAAP;
- Provide audited partnerships an elective “enhanced STAAP” that would expand the types of Sec. 6225 modifications allowed. Only audits resulting in proposed imputed underpayments (before any modifications) below a threshold amount would qualify for the enhanced STAAP;
- Allow an allocation of an adjustment to property of similar character following the allocation rules set forth in Regs. Sec. 1.755-1(c) in cases where adjustments apply to specified tax attributes of partnership property held in the reviewed year, but no longer held in the adjustment year;
- Allow any reasonable method of applying successor rules for mergers and divisions occurring between the reviewed year and the adjustment year; and
- Treat the remittance by a former partner to the partnership under a reimbursement or indemnification agreement of an allocable share of tax, interest, and penalties paid by the partnership under Sec. 6225 as a tax-free receipt by the partnership; reduce the partnership’s Sec. 705(a)(2)(B) expense by the amount of the payment and allocate that reduction in full to the former partner’s successor; and provide that the payment by the former partner is treated as a nondeductible expense by that partner.
— Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.