Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).
The technical corrections of the CAA clarifies the scope of the partnership audit rules and are intended to have a scope sufficient to address partnership-related items. Additionally, the CAA eliminated references to adjustments to partnership income, gain, loss, deduction, or credit, and replaced them with partnership-related items. “Partnership-related items” are explained as any item or amount that is relevant to determining the income tax liability of any partner, according to the Joint Committee on Taxation (JCT). Among other things, partnership-related items include an imputed underpayment, or an item or amount relating to any transaction with, basis in, or liability of the partnership. Furthermore, according to the JCT, the partnership audit rules do not apply to withholding taxes except as specifically provided. However, any partnership income tax adjustment will be considered when determining and assessing withholding taxes when the partnership adjustment is relevant to that determination. Further, the technical corrections clarify that an imputed partnership underpayment is determined by appropriately netting partnership adjustments for that year, and then applying the highest rate of tax for the reviewed year.
Pull-In and Push-Out Modifications
Additionally, the CAA includes a “pull-in” procedure, which allows for modifying an imputed underpayment without requiring individual partners to file an amended tax return. The “pull-in” procedure, if elected, would replace the “push-out” election. A push-out shifts liability to individual partners. The “pull-in” procedure contemplates that partner payments and the IRS could collect information centrally. However, the procedure permits the partnership representative or a third-party accounting or law firm to collect the data and remit it to the IRS.
The partnership adjustment tracking report required in a push out is a return for purposes of failure to file, frivolous submission, and return preparer penalties. In addition, the failure to furnish statements in a push-out is subject to the failure to file or pay tax penalties. However, neither an administrative adjustment request nor a partnership adjustment tracking report are returns for purposes of the partner amended return modification procedures.
To learn more about these changes, contact an MCB Tax Advisor at 703-218-3600.