A representative of the American Institute of CPAs (AICPA) testified on October 9 regarding proposed rules related to implementation of the centralized partnership audit regime. Michael Greenwald’s comments, during a hearing by the U.S. Department of the Treasury and Internal Revenue Service (IRS), focused on proposed rules concerning the partner-level penalty defenses and on two areas for which guidance has not been issued. The two areas are an audited partnership’s access to the IRS Office of Appeals and the Tax Cuts and Jobs Act’s (TCJA) impact on the proposed rules.
Greenwald, CPA, MPPM, who is chair of the AICPA’s Partnership Taxation Technical Resource Panel, said, “Under the proposed regulations, a partner can only assert a penalty defense, such as reasonable cause or good faith, if the partner first pays the tax and penalty due and then files a claim for refund of the penalty. This process will result in the needless expenditure of additional resources by the taxpayer and the IRS, while further extending the length of time until final resolution of the case.”
He explained that the Regime “significantly changes the way adjustments made by the IRS during an exam are assessed and paid.” By default, he said, a partnership is liable for any imputed underpayment. The underpayment is potentially reduced through requested modifications (such as, the filing of amended returns by partners). Alternatively, a partnership may elect to ‘push-out’ an adjustment to its partners, who must then prepare and file ‘adjustment statements’ for the audited and affected tax years.”
Greenwald stated, “We recommend allowing partnerships to submit defenses on behalf of the partners (both direct and indirect) during the modification period. In the case of a partnership electing the ‘push-out’ procedures, the IRS should allow the direct and indirect partners to submit a statement supporting a partner-level defense. They could submit it with their reporting year return.”
He emphasized that “it is both fair and more efficient for the IRS to consider the validity of any partner-level defense early in the process. Otherwise, the agency would force some partners to unnecessarily pay the proposed penalties.”
Turning to the need for guidance about an audited partnership’s right to file a challenge with the IRS Office of Appeals, Greenwald said, “The appeals process is a vital option for taxpayers to resolve an issue without having to go to Tax Court.” He noted that the Regime creates a “significant number” of new elections that apply to partnerships under examination and establishes new procedures and stringent statutory deadlines. “Together these changes will create issues for taxpayers wishing to challenge IRS decisions under the Regime,” he said.
Greenwald said that the comment letter the AICPA submitted on October 9 about the proposed regulations (REG-136118-15) identified eight actions or determinations by the IRS that taxpayers should, at a minimum, be able to challenge. For example, he said, taxpayers need the ability to appeal a decision on the validity of an opt-out election, a denial of a requested modification or the proposed audit adjustments among other issues.
In general, Greenwald said, taxpayers should have the right to appeal any decision by the IRS that directly affects the proposed audit adjustments, the calculation of imputed underpayment, or the ability of a partnership to make any valid election under the Regime. It is also important that the Appeals process is both fair and equitable, he stated.
Finally, he said, taxpayers and their tax preparers need guidance on the impact of the new partnership-related provisions of the TCJA to the Regime. The TCJA contains several new provisions that impact partnerships and the distributive shares of income and expenses to their partners, Greenwald explained. In particular, he said, section 163(j) concerning interest expense limitations, section 199A for the Qualified Business Income deduction, and section 954A on GILTI, all contain substantial new partnership reporting and calculation elements.
“We need guidance as soon as possible, including examples of how the Regime’s adjustments to partnership items and tax attributes specific to these new provisions are treated under sections 6225 and 6226 by partnerships and their partners,” Greenwald said.
The AICPA’s comment letter on the proposed regulations identifies 12 areas where further guidance or clarification is needed from the IRS to fairly and properly implement the Regime. The letter also includes recommendations.