We are living in an administrative adjustment request (AAR) world. Passed as part of the Bipartisan Budget Act of 2015 (BBA), the centralized partnership audit regime (CPAR) replaced the longstanding audit rules passed as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Adjustments under the CPAR to partnership-related items are filed on an AAR. The CPAR is generally applicable to partnership taxable years beginning after Dec. 31, 2017, and provides that all adjustments to partnership-related items are determined and any related tax is assessed and collected at the partnership level. This “centralization” at the partnership level generally allows the IRS to audit, assess and collect any determined underpayment of tax directly from a partnership.
Why is it an AAR world?
Practitioners are filing those AARs and the IRS is processing them, with the first audits under these new procedures starting.
Implementation of the CPAR took significant time.
Certain strategies to not file an AAR (such as a Form 3115, Application for Change in Accounting Method) and the limited amended return procedures in response to the COVID-19 pandemic contributed to delayed AAR filings.
The AAR process is unduly cumbersome for partnerships that wish to change an administrative, informational or similar item. It is difficult to comply effectively and efficiently, as the process treats all changes to partnership items in the same manner as audit adjustments.
The AICPA submitted Changes to Simplify and Improve the AAR Process Under the Centralized Partnership Audit Regime and Proposed “AAR-EZ” Process Framework, a comment letter to the IRS, proposing an “AAR-EZ” format for “ministerial items.” In this case, ministerial items generally mean items that are not relevant in determining the tax liability of any direct or indirect partner. Our AAR-EZ solutions would allow CPAR partnerships to change ministerial items without filing a formal AAR.
The current AAR format and questions do not lend themselves to fixing basic administrative errors, such as a transposition error in a partner’s Social Security number or address on an issued Schedule K-1 after the filing deadline has passed. For instance, transposing numbers on a street address used to be fairly straightforward to correct on an amended return. However, to fix such an error under CPAR, a practitioner must file an AAR, which is a burdensome process for that simple error.
To explain further, currently, a partnership may be required to file Forms 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR) and 1065, U.S. Return of Partnership Income, or 1065-X, Amended Return or Administrative Adjustment Request (AAR), as well as Forms 8985 Pass-Through Statement-Transmittal/Partnership Adjustment Tracking Report and 8986 Partner’s Share of Adjustment(s) to Partnership-Related Item(s), to properly report the partner’s Social Security number or address to both the IRS and partner. These forms are an extraordinarily resource-intensive undertaking for processing basic administrative errors, therefore the AAR-EZ is a simpler solution. In the comment letter, AICPA® proposed other ways to live in an AAR world.
The AICPA also recommends:
(1) allowing deemed automatic extension requests under the superseding returns, and
(2) a limited amended return period(s) in the case of retroactive tax changes and/or broad interpretation, to generally alleviate bottlenecks and resource constraints, streamline the AAR process and increase compliance.
These recommendations reduce the system-wide burden the current AAR process imposes on practitioners, taxpayers and the IRS.