“NEW RULES ADDRESS EARLY ELECTION INTO PARTNERSHIP AUDIT”
“The new regulations provide needed guidance and welcomed flexibility for the election into the new partnership audit rules,” said Mary A. McNulty of Thompson & Knight LLP. The time frame to elect into the audit regime allows partnerships to wait on the additional coming guidance so they can make an informed decision about whether to make the election, she said. “For example, the new regulations do not clarify whether, if an election in is made, the partnership will have the ability to make the election under section 6226 to issue amended statements to partners reflecting the audit adjustments,” she said.
Under the new regulations, partnerships may file an administrative adjustment request (AAR) after receiving a notice of selection for examination. “The guidance is favorable for a partnership that wants to file an AAR for a pre-2018 taxable year, as it allows the partnership to elect in and then file an AAR,” McNulty said. But before January 1, 2018, only partnerships that have received a notice of selection for examination may file an election. “This delayed procedure is likely necessary to allow the IRS time to issue additional regulations addressing the many unanswered questions relating to AARs,” she said.
McNulty said that it is somewhat surprising that the election is not made with the filing of a tax return or with a centralized service center. Elections are to be filed with the IRS contact who issues the notice of selection for examination. “The new regulations impose some requirements for making the election that are intended to protect the IRS and to implement the purpose of the entity-level assessment and collection procedures,” she said.
The new rules require a partnership to certify that it is not insolvent and has assets to pay a potential liability. The purpose of that certification is to keep partnerships from trying to use an election to avoid paying a liability, Cooper said. The temporary regulations also state that “an election is not valid if it frustrates the purposes of section 1101 of the BBA.” That statement might create some uncertainty for taxpayers in deciding whether to elect in, because what frustrates the purposes of section 1101 is vague, Cooper said, adding that this might be an area for additional guidance.
McNulty noted that the regulations do not specify the consequences if the representations regarding bankruptcy and insolvency are breached.