4.31.1. Introduction

(1) This Internal Revenue Manual (IRM) section provides an overview of terms and responsibilities for partnership examinations subject to and not subject to provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.

(2) Purpose : This handbook describes:

• Types of TEFRA Agreements

• Overview of the Pass-through Control System (PCS), formerly Partnership Control System

• Explanation of the TEFRA Compliance Database Initiative (CDI) Database

• Explanation of TEFRA

• Explanation of Investor Level Statute Control (ILSC) returns

• Explanation of the Bipartisan Budget Act of 2015 (BBA)

(3) Audience : Field Revenue Agents (RAs), and campus RAs, Tax Compliance Officers (TCOs), Tax Examiners (TEs) and Clerks performing examination procedures for pass-through entities and/or their investors linked on the PCS.

(4) Policy Owner : Director, Small Business/Self-Employed (SB/SE), Headquarters Examination, Examination Field and Campus Policy (SE:S:DCE:E:HQ:EFCP:CEFS).

(5) Program Owner : Program Manager, Campus Examination and Field Support (SE:S:DCE:E:HQ:EFCP:CEFS:FSP).

(6) Primary Stakeholders : SB/SE, Large Business and International (LB&I), and IRS Independent Office of Appeals.

(7) Program Goals : Establish an electronic linkage between the partnership being examined and its underlying partners in order to generate notices required by statute; monitor and control statutes; and gather closing information.

(8) Contact Information: To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.5, Providing Feedback About an IRM Section -Outside of Clearance.

(1) This handbook will explain the procedures for conducting a coordinated pass-through examination from both the field and campus perspective. The handbook is broken down into sections to allow the user to more easily find answers to questions. Check sheets are provided as a job aid and to ensure consistency is maintained.

(2) The examiner of a key case pass-through entity must understand the different types of entities, and how they are examined.

(3) The key case examiner must also know how the tax returns of the related partners are eventually adjusted.

(1) The terminology used in these sections to describe certain agreements or settlement agreements is provided below:

1. Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts. This agreement form allows the partner to agree to adjustments proposed to partnership items. Penalties are determined at the partnership level for partnership years ending after 8/5/1997. (See IRC 6221.) Use this agreement form if only proposing adjustments to partnership items and partnership level penalties, but not to affected items.

2. Form 870-LT, Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items. This form permits the partner to agree to both partnership adjustments and affected items or only partnership adjustments. A pass-through partner (i.e. a tier) cannot sign Part 2 of Form 870-LT agreeing to affected items since a pass-through partner cannot bind its underlying investors. Only the ultimate taxpayers can agree to affected items.

3. Form 870-PT(AD), Settlement Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts. This is the Appeals version of the Form 870-PT.

4. Form 870-LT(AD), Settlement Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items. This is the Appeals version of the Form 870-LT.

(2) Signing an agreement or settlement agreement:

1. Allows any partner to agree with the treatment in the partner's return of the examination (or settlement) results of the key case.

2. Removes the partner from any further partnership proceeding.

3. The TMP or partner will be agreeing to all proposed adjustments unless partial agreement language has been included on the settlement agreement form signed.

4. No subsequent claim may be filed.

5. The TMP can also agree for non-notice partners (partners holding less than a one percent profits interest in a partnership with more than 100 partners) if the Form 870-PT is modified to specifically state that the TMP is binding non-notice partners. Generally, an agreement signed by the TMP, as TMP, should not be executed unless it was signed with the attempt to bind non-notice partners.

6. All notice partners must sign their own separate agreements.

7. A settlement by a pass-through partner binds indirect partners to adjustments to partnership items and partnership level penalties, but not to affected items.

8. Non-notice partners may elect NOT to be covered by an agreement that may be entered into by the TMP, where the Form 870-PT may be modified to allow the TMP to agree for the non-notice partners. This election is made by filing a statement with the Service denying the TMP the right to enter into such a settlement.

9. The TMP cannot agree to affected item adjustments requiring deficiency proceedings for non-notice partners. Similarly, a pass-through partner cannot bind indirect partners to affected items.

Note: All settlement agreements signed by a taxpayer must be properly executed by the Service before an agreement is binding.

(1) The PCS is a computer system designed to control and monitor pass-through entity and linked partner returns. It does not replace AIMS inventory control, but it provides the additional information needed to control partner and pass-through returns and meet the legal requirements of TEFRA. The PCS is described in depth in IRM 4.29, the Pass-Through Control System (PCS) Handbook including information on special features, the various user reports, letters, input documents, and indicators. IRM 2.2 covers information related to the specific command codes.

(1) The TEFRA CDI Application is a valid substitute for IDRS TXMOD controls. The campus will load all returns onto the CDI application to assist with processing and statute control. Local procedures will be developed regarding the proper use and function of the CDI application.

(2) IDRS TXMOD controls are used to assist in inventory management and statute control. See IRM 4.31.3.13.18.1(13), CCA 42-43 (ORCAS ).

(1) Before TEFRA was enacted in 1982, partnership items appearing on individual and corporate taxpayer returns were determined by individual audits and notices of deficiency which included both partnership and nonpartnership items. Thus, multiple partners in the same partnership would be adjusted through separate proceedings unique to each partner.

• Statutory Notice - Partner A

• Statutory Notice - Partner B

• Statutory Notice - Partner C

(2) The TEFRA changed the way the Internal Revenue Service (IRS) conducts the examinations of those entities to which the TEFRA sections of the IRC apply. Along with the changes to the examination process, specific time frames and notice requirements were created. If these time frames and notice requirements are not properly adhered to, no assessments are allowable against any partner returns.

(3) After the enactment of the unified partnership audit and litigation procedures of IRC 6221 through 6234 (TEFRA), one partnership audit, notice and judicial proceeding binds all partners:

1. One NBAP is sent to the TMP to signify the beginning of an audit. Notice partners are sent copies.

2. One FPAA is sent to the TMP informing him/her of the Service’s adjustment to partnership items. Notice partners are sent copies if their partnership items have not converted to nonpartnership items.

3. Only the FPAA notice to the TMP suspends the statute of limitations for all partners and begins the petition period for a unified judicial proceeding.

4. A petition based on FPAA may be filed in Tax Court, District Court, or Court of Federal Claims. Only one petition based on the FPAA to the TMP may be filed on behalf of all partners. Duplicate petitions will be dismissed.

5. If the TMP does not file a petition within the first 90 days after the FPAA was mailed, a petition may be filed within 60 days from the close of the 90-day period by any notice partner or 5 percent group.

6. The single petition that goes forward will bind all remaining partners regardless of whether they participate or intervene. If no petition is filed, the defaulted FPAA will bind all partners remaining in the partnership proceedings.

7. Once an FPAA is defaulted, no separate refund action is allowed to change partnership items. (IRC 6511(g) and IRC 7422(h)) Thus, all adjustments to partnership items that may result in a refund must be raised in a petition to the FPAA since this will be the sole opportunity to file a petition resulting in a refund.

8. The Service computes the resulting assessments and refunds following the default of the FPAA or the final decision of the Tax Court. Petitions to District Court or the Court of Federal Claims are treated as defaulted FPAA’s for assessment and collection purposes in order to preserve the status of those forums as refund courts. (IRC 6225)

9. Penalties are assessed using notice of deficiency procedures following the partnership proceeding. For partnership years ending after August 5, 1997, however, they must be determined at the partnership level and directly assessed following the partnership proceeding even if the amount they are computed on are affected items subject to deficiency procedures.

(4) The unified audit and litigation procedures (IRC 6221 - 6234) unified the procedures in three respects:

1. All partners are governed by one administrative proceeding and one docketed proceeding (if applicable).

2. All deficiencies and refunds are determined based on the single unified proceeding.

3. IRC 6229 sets forth a minimum assessment period for all partners running from the date the partnership return is filed or due to be filed, whichever is later.

(5) The existence of the CPF is to provide administrative assistance to the field offices. The CPF ensures the TEFRA requirements or partner level statute controls are met in accordance with the applicable sections of the IRC.

(6) If the examiner fails to utilize PCS and the CPF (which is mandatory for TEFRA), then the examiner assumes all of the responsibilities of the CPF including administrative functions, issuances of all notices, the recognition of and the actions required within the proper time frames and the proper resolution of all of the related partner cases. The examiner must secure all of those returns for resolution. If a partner in a pass-through entity is itself another pass-through entity (a pass-through entity, also called a tier), then the examiner must also secure all partner returns of the tier. As long as this tiering situation exists, the examiner must continue to secure and control all of the related returns.

(7) When the examiner utilizes the CPF, substantially all of the burdens of administrative duties, time frames, notice requirements, partner examination report writing and tiering situations are shifted from the examiner to the CPF. The examiner is free to conduct the examination of the key case and the CPF will complete all of the required administrative functions.

(1) Pass-through entities (Form 1120-S and Form 1065) where the assessment periods are controlled at the investor level. Proceeding involve investors in S corporations and partnerships that are not subject to TEFRA or elect out of BBA.

1. NonTEFRA partnerships are qualifying small partnership returns with tax years that begin before January 1, 2018, that do not elect into TEFRA.

2. BBA Elect Out (BEO) partnerships are those that elect out of BBA for tax years beginning on or after January 1, 2018.

(2) Examiners may elect to link ILSC investors on PCS but still maintain control of all investors. PCS linkage is advised as it makes others aware of the examination and the related investors. This is valuable in the event an investor has multiple pass-through investments which may also be under examination. The awareness may prevent the inadvertent issuance of a statutory notice of deficiency by TS that is unaware of another exam.

(3) If the examiner utilizes the CPF in the ILSC examination, then substantially all the burden of case control, statute protection and tiering are shifted to the CPF. As in TEFRA examinations, if the examiner starts out controlling the case but decides later to shift much of the responsibilities to the CPF, the examiner must have completed all necessary actions the CPF would have completed up to that time. The requirements for shifting responsibilities for ILSC cases are much more stringent than the requirements for TEFRA cases. Before any transfers can take place, it requires complete and total agreement and cooperation between the Technical Service TEFRA/Pass-Through Coordinator and the Campus ILSC Coordinator.

(4) If the examiner elects not to use the PCS and the CPF for an ILSC case, the examiner assumes responsibility for substantially all the same functions as for TEFRA cases. ILSC cases do not have the same notice requirements or time frames, but the tiering, case control and report preparation requirements still exist for the examiner. With ILSC cases, if the examiner does not utilize the CPF, the examiner assumes complete and total statute control for all related investors. Unlike TEFRA cases where the statute for all related investors is controlled at the key case level, the statute control for all related investors of an ILSC key case is controlled at the ultimate investor level. The examiner must secure all investor returns (including pass-through entities) and secure statute extensions for all entities required.

(1) Before BBA was enacted in 2015, partnership returns were examined under TEFRA or NonTEFRA procedures. For partnership tax years beginning after December 31, 2017 and forward, partnership examinations are audited under BBA procedures unless the partnership is eligible and timely elected out of BBA.

(2) See IRM 4.31.9 Pass-Through Entity Handbook, Centralized Partnership Audit Regime (BBA) Field Examination Procedures.

(1) If a NonTEFRA/ILSC key case is not linked on PCS, Appeals will only accept protesting investors cases if both of the following are met:

1. The entity has five or fewer investors, and

2. None of the investors is a pass-through entity.

(2) If a NonTEFRA/ILSC key case is unagreed, the key case is not linked, and the case does not meet the criteria for sending multiple investor cases to Appeals, the key case examiner must either link the key case on PCS or hold the investor returns until the key case entity issues are resolved in Appeals. IRM 4.31.6, Investor Level Statute Control (ILSC) Pass-Through Examinations - CPF Procedures, describes the statute requirements for linking cases. The CPF will make no exceptions.

(3) All BBA cases will be centralized through Appeals TEFRA/BBA Team. BBA Administrative Adjustment Requests (AARs) and all other BBA cases will be handled under the same procedures. IRM 8.19.14.