INSIGHT: Updated IRS Forms Implement Centralized Audit Procedures for Partnerships

The Bipartisan Budget Act of 2015 (BBA) created a new centralized partnership audit regime generally effective for partnership tax years beginning after 2017, replacing the consolidated audit rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The Internal Revenue Service has released numerous new or updated forms implementing the new audit procedures. This article provides an overview of some of the more common BBA forms that partnerships and their partners may need to complete.

For convenience, these forms can be divided into seven categories: (i) forms for electing out of (or into) the centralized partnership audit procedures; (ii) forms for appointing or changing partnership representatives and designated individuals; (iii) a form for a partner to provide notice of inconsistent treatment; (iv) forms for requesting modifications to imputed underpayments; (v) forms affecting the timeframe for modifying imputed underpayments; (vi) forms for making or revoking push-out elections; and (vii) forms for making administrative adjustment requests. Each of these categories is discussed below.

The statutory and regulatory rules underlying these forms are complex. In particular, one or more of these forms only may be filed after one or more events has occurred, may need to be filed within specific time frames, or may have no effect without IRS consent. A summary of the substantive rules governing the time and manner for submitting these forms or the impact of filing them is beyond the scope of this article. Also, although the information in this article was current when the article was written, the IRS may change these forms and instructions at any time. Taxpayers should consult the IRS’s website for updated forms, instructions, or other guidance.

1. Forms for electing out of (or into) the centralized partnership audit procedures

In general, partnerships with 100 or fewer partners can annually elect out of the centralized partnership audit regime if each partner for the tax year is an individual, a C corporation, a foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner. If a partnership makes an election out of the centralized partnership audit regime, the partnership must complete and attach Schedule B-2 (Form 1065), Election Out of the Centralized Partnership Audit Regime, to the partnership return for the tax year the election is being made.

In some circumstances, a partnership may elect to apply the centralized audit procedures for any partnership return filed for taxable years beginning after Nov. 2, 2015 and before Jan. 1, 2018. This type of election is made by the partnership on Form 7036, Election under Section 1101(g)(4) of the Bipartisan Budget Act of 2015.

2. Forms for appointing or changing partnership representatives and designated individuals

A partnership that has not elected out of the centralized audit procedures for partnerships must appoint a partnership representative (PR) who shall have the sole authority to act on behalf of the partnership in the centralized partnership audit procedures. The designation of a PR must be made for each respective year on the partnership’s Form 1065, U.S. Return of Partnership Income. If an entity is designated as the PR, the partnership must also appoint an individual to act on the entity’s behalf (a designated individual, orDI). On the 2019 Form 1065, spaces for this information are on the bottom of page 3.

Form 8979, Partnership Representative Revocation, Designation, and Resignation, is used to revoke a partnership representative or designated individual, resign as a partnership representative or designated individual, or designate a partnership representative where no designation of a partnership representative is in effect.

3. Form for a partner to provide a notice of inconsistent treatment

A partner in a partnership that is subject to the centralized partnership audit procedures generally must report items consistent with the way they were reported to them on Schedule K-1 (Form 1065). Any such partner must use Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), to notify the IRS of any inconsistency between the partner’s tax treatment of an item and the way the partnership treated and reported the same item on its return.

4. Forms for requesting modifications to imputed underpayments

Generally, under the BBA, the IRS initially determines an imputed underpayment (IU) by multiplying the net amount of adjusted partnership-related items (PRIs) by the highest tax rate applicable to individuals and corporations. The IRS notifies the partnership of a proposed IU and the underlying partnership adjustments in a notice of proposed partnership adjustment (NOPPA) that it mails to the partnership. A partnership that receives a NOPPA may request modification of a proposed IU. The modification procedures are designed to determine an IU amount that more closely reflects the tax the partners would have paid had they correctly reported the adjusted items.

The primary form for requesting an imputed underpayment modification is Form 8980, Partnership Request for Modification of Imputed Underpayments under IRC Section 6225(c). In addition to this form, the partnership may need to complete one or more additional IRS forms that will be attached to Form 8980, depending on which types of modification the partnership is requesting.

If the partnership is requesting a modification due to one or more partners amending their returns, or if the partnership wants to use the “pull-in” procedure, it must obtain and provide to the IRS an affidavit from any relevant partner on Form 8982, Affidavit for Partner Modification Amended Return Under IRC § 6225(c)(2)(A) or Partner Alternative Procedure Under IRC § 6225(c)(2)(B).

If the partnership is requesting a modification because one or more of its partners is tax-exempt, the partnership must obtain and provide to the IRS a certification from any relevant partner on Form 8983, Certification of Partner Tax-Exempt Status for Modification Under IRC § 6225(c)(3).

5. Forms affecting the time frame for modifying imputed underpayments

Unless the IRS grants an extension, a partnership requesting modification must submit all information required with respect to a request for modification on or before 270 days after the date the NOPPA is mailed to the partnership. Furthermore, unless the partnership agrees, the IRS may not mail a notice of final partnership adjustment earlier than 270 days after the date on which the NOPPA is mailed to the partnership.

There are two new forms relevant to the time frame for modifying imputed underpayments. First, if the partnership wants to request to waive the 270-day restriction period under IRC Section 6231(b)(2)(A) for mailing the notice of final partnership adjustment, it will file Form 8981, Waiver of the Period Under IRC Section 6231(b)(2)(A) and Expiration of the Period for Modification Submissions Under IRC Section 6225(c)(7). As the title suggests, filing this form will have the effect of waiving the partnership’s right to make any modification submissions on or after the date the waiver becomes effective.

Conversely, if the partnership wishes to request to extend the time frame for modifying imputed underpayments, it will file Form 8984, Extension of Taxpayer Modification Submission Period Under Section 6225(c)(7).

6. Forms for making or revoking push-out elections

A partnership makes an election to “push out” partnership adjustments to reviewed year partners under Section 6226 (“push-out election”) on Form 8988, Election for Alternative to Payment of the Imputed Underpayment – IRC Section 6226.

If a partnership makes a push-out election, it must file two additional forms. The first form is Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Section 6226 and 6227). This form is used to furnish and transmit to each partner that partner’s share of adjustments to PRIs.

If an electing partnership provides this statement to a pass-through partner, such as a partnership or S corporation, the pass-through partner will need to decide whether it wants to compute and pay an IU with respect to, or further push out, its share of the adjustments. If the pass-through partner pushes out its share of the adjustments, it will also need to furnish Forms 8986 to its partners.

Partners other than pass-through partners will report adjustments shown on Forms 8986 received from partnerships using Form 8978, Partner’s Additional Reporting Year Tax, and, if applicable, Form 8978, Schedule A, Partner’s Additional Reporting Year Tax (Schedule of Adjustments). This form must be filed with a timely filed return for the partner’s reporting year (the year in which the partnership furnished Form 8986 to its partners).

The second form that a partnership making a push-out election must file is Form 8985, Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227). This form is used to summarize and transmit Forms 8986 by a partnership that has made a push-out election. In addition, this form is used to summarize and transmit Forms 8986 filed by a pass-through partner if it chooses to further push out its share of an electing partnership’s adjustments. Finally, this form is used to report a payment, and related calculations, made by a pass-through partner that chooses to pay its share of an electing partnership’s adjustments. In these cases, the pass-through partner uses Form 8985-V, Tax Payment by a Pass-Through Partner, to submit its tax payment.

A partnership may request permission to revoke a prior push-out election on Form 8989, Request to Revoke the Election for Alternative to Payment of the Imputed Underpayment. By submitting this request to revoke the prior election, however, the partnership becomes liable for the imputed underpayment, plus any applicable penalties and interest.

7. Forms for making administrative adjustment requests

To correct a previously filed partnership return on behalf of a partnership subject to the centralized partnership audit procedures, the PR or DI will generally be required to file an administrative adjustment request (AAR). If eligible to be paper filed, a partnership uses Form 1065X, Amended Return or Administrative Adjustment Request (AAR). If electronically filed, a partnership should file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), along with a Form 1065, U.S. Return of Partnership Income (with the amended return box checked). If an AAR has adjustments that result in an IU, and the partnership filing the AAR (AAR partnership) does not elect to push out those adjustments, the AAR partnership must pay the IU when the AAR is filed. If the AAR partnership pushes out any partnership adjustments or has adjustments that do not result in an IU, it is required to file Forms 8986 and 8985 under procedures similar to those described above in connection with push-out elections under Section 6226. Similarly, if the AAR partnership pushes adjustments out to a pass-through partner, the pass-through partner will need to decide whether it wants to compute and pay an IU with respect to, or further push out, its share of the AAR partnership’s adjustments. The pass-through partner will need to file Form 8985 and either Form 8985-V or Forms 8986. Partners other than pass-through partners will report adjustments shown on Forms 8986 received from partnerships using Form 8978, and, if applicable, Form 8978, Schedule A.

8. Conclusion

The BBA rules are complex. By creating these important forms and the accompanying instructions, the IRS has painted a more complete picture of how the IRS will implement the new centralized audit procedures.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matthew Lay is a Managing Director in the passthroughs group in the Washington National Tax office of Deloitte Tax LLP. Before joining Deloitte, Matthew worked for the Passthroughs and Special Industries division in the IRS Office of Chief Counsel in various roles, specializing in the taxation of partnerships.

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