Partnerships should benefit from IRS guidance allowing them to now take advantage of tax relief from coronavirus legislation, but practitioners point out that some unresolved filing issues remain for those entities.
The IRS released guidance (Rev. Proc. 2020-23, 2020-18 IRB 1) April 8 that allows partnerships to take advantage of items such as the bonus depreciation changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) by allowing them to file amended returns for tax years 2018 and 2019 in some cases by September 30, 2020.
Rochelle Hodes of Crowe LLP, who worked on the partnership audit regime regulations while at Treasury, praised the government for responding so quickly to the tax community’s concerns.
“This is phenomenal relief,” Hodes said. “It shows that the IRS was absolutely being sensitive and listening to the needs of taxpayers, and it’s a well-crafted and timely solution.”
And more guidance on this topic is expected soon, Hodes added.
“My understanding is that the amended returns are going to be treated as amended returns, not substitute [administrative adjustment requests (AARs)], and that FAQs will be coming soon,” Hodes said.
Ellen McElroy of Eversheds Sutherland (US) LLP said it’s heartening that the IRS allowed partnership amended returns in this context.
The relief comes after practitioners were quick to point out that partnerships were shut out of obtaining the tax benefits in the CARES Act meant to help businesses through the economic downturn. Those benefits include a technical correction that retroactively allows qualified improvement property (QIP) to qualify for 100 bonus depreciation and the reduced depreciable life of QIP under the alternative depreciation system from 40 years to 20 years.
The changes made under the centralized audit regime, which was effective for the 2018 tax year and allows the IRS to audit partnerships at the entity level, prevented those CARES Act provisions from helping partnerships, according to practitioners.
Among the other vast changes to the partnership landscape under the audit regime is that partnerships subject to the regime aren’t able to simply file amended returns; instead, they must file AARs. If the AAR results in an imputed underpayment, the partnership can pay that amount or elect to use rules based on the push-out election in which reviewed-year partners would pay the amounts.
But if a partnership files an AAR that doesn’t result in an imputed underpayment, rules similar to the push-out regime under section 6226 apply and reviewed-year partners must consider the adjustments in the year in which they received them, and refunds aren’t generally available.
Practitioners called on the IRS and Treasury to act quickly on addressing those issues, and recommendations started flowing in calling for partnerships to have the ability to file superseding returns or access to procedures similar to the automatic relief provisions under the section 9100 rules.
The IRS responded in the revenue procedure by allowing eligible partnerships to file amended returns for tax years beginning in 2018 and 2019 by using Form 1065, “U.S. Return of Partnership Income,” checking the “amended return” box, and issuing amended Schedules K-1.
The relief is available only to audit regime partnerships that filed returns and issued Schedules K-1 for tax years beginning in 2018 or 2019 before the release of the revenue procedure. But the amended partnership returns aren’t limited to CARES Act tax benefits, the IRS said.
“The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law,” according to the revenue procedure. Special rules were also provided for partnerships that have previously filed AARs for an affected tax year.
Shamik Trivedi of Grant Thornton LLP said the IRS made the right call regarding AARs and pointed to section 2.04 of the guidance.
“Requiring an AAR to claim a benefit, which would only be realized potentially in 2021, is at odds with the spirit of the CARES Act, which was designed in part to increase liquidity in the short term,” Trivedi said. “There’s also still not a lot of experience in filing AARs by partnerships, not to mention the compliance to be undertaken by partners when they receive their AAR statements.”
Trivedi said the revenue procedure doesn’t quite apply a superseding return concept like Rev. Proc. 2019-32, 2019-33 IRB 659, did, but he added that it will relieve a lot of burdens stemming from the audit regime for partnerships looking to make adjustments that could result in refunds for partners.
“I do think it’s important to consider that Rev. Proc. 2020-23 does not appear to ‘turn off’ the consistency rule of section 6222,” Trivedi said. “So that leaves an open question of whether a partner is obligated to file their own amended return when they receive an amended K-1 or risk a computational adjustment by the IRS. Generally, there is not a statutory requirement to file an amended return.”
Monte Jackel of Jackel Tax Law pointed out that the revenue procedure implies by its reference to section 6222 that partners must also file amended returns for 2018 and 2019. But it’s not clear what happens if some partners file amended returns but others don’t, he added.
“The revenue procedure should have dealt with this,” Jackel said. “After all, the tax returns of the partners were correct when they were filed, and there is no legal requirement to file an amended return if the return as filed was correct.”
Unresolved Issues
Glenn Dance of Holthouse Carlin & Van Trigt LLP, who sent the IRS and Treasury a comment letter requesting relief, said he’s pleased that the IRS provided much-needed relief, but pointed out a few issues with it.
The IRS didn’t provide relief for 2017 tax year partnership returns that would be subject to old audit regime rules under the 1982 Tax Equity and Fiscal Responsibility Act, according to Dance.
Dance said he assumes that the IRS doesn’t like TEFRA any more than practitioners do, and it recognizes that if TEFRA partnerships file amended returns, the only way that puts money into partners’ pockets is if the IRS recalculates the partners’ liabilities for affected years and processes a refund claim — under TEFRA, the partners don’t file a claim for refund.
“TEFRA was a very broken system, and I suspect [the IRS wants] nothing more than to watch it sail into oblivion, not continue that excrement show, as we asked them to do,” Dance said.
Jackel said the same partnership agreement that was in effect before the revenue procedure was released applies to the allocations to partners for the 2018 and 2019 tax years. Partnerships can’t change the allocations to reflect the QIP fix, and the revenue procedure should have said that, he noted.
Clarification, April 9, 2020: An earlier version of this story stated that qualified improvement property is eligible for 100 percent bonus depreciation only as a result of the CARES Act and that taxpayers may have to file amended 2017 returns. However, the Tax Cuts and Jobs Act and Rev. Proc. 2019-33 provide that 100 percent bonus depreciation is generally available for qualified improvement property placed in service on September 27, 2017 through December 31, 2017, which was not changed by the CARES Act.