On August 4, 2016, the Internal Revenue Service issued temporary regulations regarding the time, place and manner for a partnership to elect to apply the new partnership audit regime established by the Bipartisan Budget Act of 2015. The regulations are applicable to any partnership that desires to elect to have the new partnership audit regime apply to its returns filed for taxable years beginning after November 2, 2015 and before January 1, 2018. The regulations took effect on August 5, 2016.
The Bipartisan Budget Act of 2015
The Bipartisan Budget Act of 2015 (the “BBA”), which was signed into law in November 2015, includes sweeping changes to the rules governing federal tax audits of entities treated as partnerships for US federal income tax purposes. The new rules replace the long-standing regimes for auditing partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and the Electing Large Partnership (“ELP”) rules. The new rules allow the Internal Revenue Service (the “IRS”) to deal with only a single “partnership representative,” similar to the tax matters partner under TEFRA, during an audit and any related court cases. Unless a partnership elects out, the new rules impose an entity-level tax on the partnership at the highest rate of tax in effect for the reviewed year (subject to potential reduction) for any understatements of partnership income. The purpose of the new rules is to streamline partnership audits under a single set of rules and to make it easier for the IRS to assess and collect tax after a partnership audit. Importantly, the new audit regime will apply only to partnership tax returns filed for taxable years beginning after December 31, 2017 unless a partnership elects to apply them to an earlier taxable year. The temporary regulations issued on August 4, 2016 provide guidance on how a partnership can elect to have the new partnership audit regime apply to returns filed after November 2, 2015 (the date of the enactment of the BBA), and before January 1, 2018. During this interim period, an election by a partnership is only valid if made in accordance with the requirements of the temporary regulations set forth in section 301.9100-22T, and an election, once made, may only be revoked with consent of the IRS. A partnership may not request an extension of time for making an election described in section 301.9100-22T.
Temporary regulations set forth in section 301.9100-22T provide the time, form and manner for a partnership to make an election pursuant to the BBA. An election under section 301.9100-22T must be made within 30 days of the date of notification to a partnership, in writing, that a return of the partnership for an eligible taxable year has been selected for audit.42 The notice of selection for examination referred to in section 301.9100-22T(b) is a notice that precedes the notice of an administrative proceeding required under section 6231(a) as amended by the BBA. A written statement with the words “Election under Section 1101(g)(4)” written at the top of the statement will satisfy the notice requirements.43 The statement must be provided to the individual identified in the notice of selection for examination as the IRS contact for the examination. The written statement must be dated and signed by the tax matter partner, as defined under section 6231(a)(7), and the applicable regulations, or signed by a person who has the authority to sign the partnership return for the taxable year under examination.44 The fact that an individual dates and signs the written statement is deemed to be prima facie evidence that the individual is authorized to make the election on behalf of the partnership.45
The written statement must include the following:
(i) The partnership’s name, taxpayer identification number and the partnership taxable year for which the election is made;
(ii) The name, taxpayer identification number, address and daytime telephone number of the individual who signs the statement;
(iii) Language indicating that the partnership is electing application of section 1101(c) of the BBA for the partnership return for the eligible taxable year identified in the notice of examination;
(iv) Information necessary to properly designate the partnership representative, including the name, taxpayer identification number, address and daytime telephone number of the representative as well as any additional information required by applicable regulation and other guidance issued by the IRS.
The statement must also include the following representations:
(i) The partnership is not insolvent and does not reasonably anticipate becoming insolvent before resolution of any adjustment with respect to the partnership taxable year for which the election is being made;
(ii) The partnership has not filed, and does not reasonably anticipate filing, voluntarily a petition for relief under title 11 of the United States Code;
(iii) The partnership is not subject to, and does not reasonably anticipate becoming subject to, an involuntary petition for relief under title 11 of the United States code; and
(iv) The partnership has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment with respect to the partnership taxable year at issue.
The person who signs the statement must sign under the penalties of perjury and represent that the individual is duly authorized to make the election and that, to the best of the individual’s knowledge and belief, all of the information contained in the statement is true, correct and complete. Upon receipt of the written election, the IRS will promptly mail a notice of administrative proceeding to the partnership and the partnership representative, as required under Section 6231(a)(1).
Section 301.9100-22T(c) provides an exception to the general rule regarding the election only after first receiving a notice of selection for examination. A partnership that has not been issued a notice of selection for examination may still make the election with respect to a partnership return for an eligible taxable year for the purpose of filing an administrative adjustment request (“AAR”) under section 6227, as amended by the BBA. However, an election under 301.9100-22T(c) by a partnership that has not been issued a notice of selection for examination may not make the election before January 1, 2018. The Treasury Department and the IRS intend to issue guidance regarding AARs under section 6227 as amended by the BBA before January 1, 2018.