Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, included several retroactive tax provisions designed to provide immediate access to refunds. On April 8, 2020, the IRS issued Revenue Procedure 2020-23 to make it easier for partnerships subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) to claim CARES Act refunds for 2018 and 2019.
Without this relief, the only way for a BBA partnership to adjust prior year returns is to file an administrative adjustment request (AAR), which in most cases would delay the partner’s refund until 2021. Under the revenue procedure, BBA partnerships have until September 30, 2020 to amend returns and Schedules K-1 for partnership returns that were filed before April 8, 2020.
To file an amended return under the revenue procedure, the partnership must use a Form 1065, U.S. Return of Partnership Income (Form 1065), with the “Amended Return” box checked, not the Form 1065X. The partnership must write “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return and attach a statement with each Schedule K-1 sent to its partners with the same notation. An amended return under the revenue procedure may be file electronically or on paper.
Procedural Issues Raised by Amended BBA Partnership Returns
No additional guidance has been provided to describe how amended returns filed under the revenue procedure will be treated. Without guidance, it is unclear what procedural rules apply. Consider the following:
- What is the authority to permit BBA partnerships to file amended returns? Section 2.02 of the revenue procedure states that the relief to file amended returns and amended Schedules K-1 is an exercise of the IRS’s authority under IRC Section 6031(b). However, IRC Section 6031(b) relates to partner statements (Schedules K-1), not partnership returns. While IRC Section 6031(b) does not provide authority for amended returns under BBA, other authority, such as IRC Section 7805(a), might provide that authority.
- Do BBA procedures apply if the IRS adjusts items on the amended return? Section 2.05 of the revenue procedure states that “[a] BBA partnership that files an amended return pursuant to this revenue procedure is still subject to the centralized partnership audit procedures enacted by the BBA.” However, an argument can be made that since an amended return is not contemplated under the BBA statutory regime, BBA procedures do not apply. A mere statement in a revenue procedure does not provide a strong basis for the IRS to defend a position that the amended return is subject to BBA procedures.
- What is the period of limitations for the IRS to adjust items on amended returns? Generally, filing an amended return does not extend the period of limitations on assessment. IRC Section 6235 generally provides that the period for the IRS to make adjustments under BBA is three years after the later of filing a BBA partnership return or filing an AAR. How does the period of limitation for adjustment under IRC Section 6235 apply (if at all) if an amended return is filed?
- If BBA applies to amended returns, how will IRS adjustments to items reflected on the amended return be treated under BBA? Will the adjustments reflected on the amended return be included in the notice of proposed adjustment (NOPA) or final partnership adjustment (FPA)? Will a court have jurisdiction over the adjustments reflected on the amended return in a BBA proceeding?
- If BBA does not apply to amended returns, will there be one or two audits? If the amended return is not subject to BBA, does that mean that the IRS must audit the entire tax year to which the amended return relates under non-centralized deficiency procedures (i.e., audit each partner separately), or would there be two audits: one under BBA for the original return and any AARs that were filed before the amended return and a second audit of each separate partner with respect to the adjustments made on the amended return?
- How does a BBA partnership make further adjustment to items after filing an amended return(after September 30, 2020?)? Does the partnership file an AAR or another amended return? If the partnership is required to file an AAR, does the AAR take into account the adjustments made by the amended return?
- How do partners take into account adjustments on the amended Schedules K-1 they receive? The revenue procedure is silent on this. It is likely that the IRS expects partners to file amended returns for the year to which the adjustments on the amended Schedule K-1 relate. However, guidance for partners would be helpful.
- Do BBA consistency rules apply to partners receiving amended Schedules K-1? IRC Section 6222 requires a partner to treat partnership-related items on their return consistent with the treatment of the items on the return the partnership files. Under IRC Section 6222, the IRS can use math error assessment against the partner to immediately assess any tax resulting from an inconsistent position. Treasury Regulation Section 301.6222-1(a)(4) provides that the partnership return includes any amendments or supplements to the return including an AAR. Section 3.03 of the revenue procedure states: “For purposes of section 6222, the amended return replaces any prior return (including any AAR filed by the partnership) for the taxable year for purposes of determining the partnership’s treatment of partnership-related items.” This language is vague and does not address math error assessment or notice of inconsistent treatment. Guidance specifically addressing a partner’s inconsistent treatment would be helpful.
Legislation could solve much of the uncertainty and provide a consistent policy direction. One legislative option would be to amend IRC Section 6227 to provide the IRS with regulatory authority to prescribe an alternative method for adjusting partnership-related items, including amended returns. In addition, legislation could address the following:
- a time limit for making adjustments under the alternative method,
- whether the consistency requirement in IRC Section 6222 applies to the alternative method (and if so, how),
- how partners take adjustments under the alternative method into account and procedural rules related to partners (i.e., do partners file amended returns, what is the period of limitations on assessment with respect to any tax due on the partner’s return), and
- how a regulatory method for making adjustments is treated for purposes of IRC Section 6232 through IRC Section 6235 (assessment, collection and payment; interest and penalties; court jurisdiction; and the period for adjustment).
In the meantime, Treasury and the IRS should consider publishing regulations under BBA to address the procedural questions regarding amended returns. Regulations would provide authoritative guidance that is informed by comments from the public. While some taxpayers might still challenge IRS on the treatment of amended returns even if regulations are published, taxpayers would have certainty about the rules, and the IRS would have a stronger basis for defending its rules.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Rochelle Hodes is a principal in the Washington National Tax Office at Crowe. She has over 29 years of experience providing tax controversy and tax policy services.