As many readers know, the Bipartisan Budget Act of 2015 (“BBA”) repeals the long standing TEFRA procedures governing IRS examinations of partnerships. As a result, beginning January 1, 2018, partnerships are subject to a centralized partnership audit regime. However, partnerships are permitted to make an election to have the BBA rules apply to partnership returns filed for tax periods beginning after November 2, 2015 and before January 1, 2018. For most partnerships, this will apply to the 2016 and 2017 tax years.
Early Election Procedures under Section 1101(g)(4) of the BBA
Partnerships who receive written notification that a partnership return for an eligible year has been selected for examination have 30 days after the date of such notification to file an election to be subject to the BBA centralized partnership regime for that year. The election can be made on Form 7036, or by preparing a statement that complies with the regulations. The election statement requires the partnership representative to represent that the partnership (1) is not insolvent and does not reasonably anticipate becoming insolvent before resolution of any adjustment for the partnership taxable year for which the election is being made; (2) is not currently and does not reasonably anticipate become subject to the bankruptcy petition under Title 11; and (3) has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment.
On June 29, 2017, the Commissioners of the LB&I division and the SB/SE division issued a memo addressing procedures initial contacts with taxpayers eligible to make the early election. The memo educates managers and examiners on which partnerships are eligible to make the election, how and when the election is made, the proper content of the election statement, and related correspondence procedures. The memo requires the issuance of a new Initial Contact Letter, Letter 2205-D, at the beginning of a partnership examination. If the partnership responds by making an early election, the process outlined below is followed. If an early election is not made, examiners are instructed to follow existing TEFRA or NonTEFRA procedures.
The memo instructs examiners who receive elections to verify that no amended returns or administrative adjustment requests have been filed as this would disqualify the partnership from making the early election. The memo also instructs examiners to ensure that Form 7036 is properly completed or that an election not on Form 7036 meets the requirements of Treas. Reg. section 301.9100-22T, request any missing information from the taxpayer if the 30-day election window is still open, and determine whether the election is valid. The memo further instructs the examiner to wait 30 days after the valid election is received before issuing a notice of administrative proceeding. The reason for the 30-day waiting period is to allow the partnership to file any administrative adjustment requests as permitted under Section 6227 as amended by the BBA. During this 30-day period, examiners are instructed to perform a “cursory check” to determine whether the partnership representative’s name, address, identification number and phone number are correct. Examiners are not permitted to issue a notice of administrative proceeding until the 30-day period expires.
We expect to see continued guidance from the IRS on BBA centralized partnership examination procedures as the rules become effective.