For those partnerships who had not elected early application or validly elected out, the 2018 tax year was the first year in which the new partnership audit rules, enacted by the Bipartisan Budget Act of 2015 (the “BBA”), took effect. These new partnership audit rules (the “BBA Audit Rules”) enacted sweeping changes, applicable to all partnerships who have not validly elected out of the BBA regime (referred to as a “BBA Partnership”). One such change was the overhaul of the amended partnership return rules.
Partnerships are required under Section 6031 of the Internal Revenue Code (the “Code”) to file partnership returns reflecting items of gross income and deductions, and to provide a copy of the Schedule K-1 to each partner. Section 6031(b) prohibits BBA Partnerships from amending the information required by Section 6031(a) to be provided to partners after the due date of the partnership return, unless one of the limited exceptions applies or specifically provided by the Secretary of the Treasury or his delegate. The result of these provisions is that, beginning with the 2018 taxable year, a BBA Partnership generally cannot file an amended partnership return and issue amended Schedules K-1 to partners. Rather, in order to correct items on a previously filed Form 1065 for taxable years beginning after December 31, 2017, a BBA Partnership must file an Administrative Adjustment Request (an “AAR”), authorized by Section 6227.
The filing requirements and tax consequences of AARs are complex and vastly different than those for traditional amended returns. Adjustments made to partnership-related items in an AAR are not accounted for in the year the adjustments relate to, as they typically were with amended returns. Instead, the adjustments from the AAR are taken into account, either by the partnership or the reviewed year partners in the case of a push-out AAR, in the year the AAR is filed. This eliminates amended returns filed at the partner level as a result of partnerships issuing amended Schedules K-1. For example, if a partnership needed to correct items on its 2018 tax return and filed an AAR in 2020 to do so, the adjustments would be taken into account on the 2020 tax returns filed in 2021.
The rules enacted under the BBA have caused confusion and change to areas many tax professionals had become quite familiar with, and even now, years after the BBA Audit Rules were adopted by Congress, the nuances of the rules are still being discovered. This is especially true of AARs, as many BBA Partnerships may be just now realizing the need to amend a return under these new rules.
But, as of April 8, 2020, the procedures available for correcting previously-filed partnership tax returns for 2018 and 2019 have once again changed. The IRS published Revenue Procedure 2020-23 on April 8, 2020, which temporarily allows BBA Partnerships to file amended partnership returns for the 2018 and 2019 tax years in order to take advantage of retroactive relief provisions, such as the modification of limitations on excess business losses and business interest expenses, available under the recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act. Because an AAR would not allow partners to benefit from the relief provisions until they file their tax return for the year the AAR was filed, presumably in 2021 for an AAR filed in 2020, allowing for amended returns provides partners a way to immediately benefit from the relief provisions. Notwithstanding this, BBA Partnerships are still permitted to file AARs, rather than amended returns, for 2018 and 2019 if they prefer to do so, although the result would be a shifting of relief benefits to a later year.
Rev. Proc. 2020-23 provides that eligible BBA Partnerships may file amended partnership returns and furnish corresponding Schedules K-1 to partners for taxable years 2018 and 2019 before September 30, 2020. BBA Partnerships who filed Forms 1065 and provided partners Schedules K-1 for the taxable years beginning in 2018 or 2019 prior to the issuance of Rev. Proc. 2020-23 are eligible for this special filing and furnishing procedure. While this special filing relief is designed to allow partnerships and partners to take into account tax changes brought about by the CARES Act, the amended returns are also permitted to take into account any other tax attributes to which the partnership is entitled by law.
A BBA Partnership filing an amended return for 2018 or 2019 under the provisions of Rev. Proc. 2020-23 must file, either electronically or by mail, a Form 1065 with the “Amended Return” box checked, and must clearly indicate that the return is being filed pursuant to the Rev. Proc. by writing “FILED PURSUANT TO REV. PROC. 2020-23” at the top of the return and attaching a statement with the same notation to each Schedule K-1 the partnership sends to its partners. This amended return replaces any prior return filed for the taxable year (including any AAR) for purposes of Section 6222.
Rev. Proc. 2020-23 also provides guidance for those BBA Partnerships who wish to take advantage of the amended return option but who are currently under examination for the 2018 or 2019 taxable years and for BBA Partnerships who have previously filed an AAR. The Rev. Proc. also briefly addresses coordination with Notice 2019-46 for those taxpayers with Global Intangible Low Tax Income (“GILTI”).
BBA Partnerships that file amended returns pursuant to Rev. Proc. 2020-23 remain subject to the BBA Audit Rules. After September 30, 2020, BBA Partnerships will be unable to file amended returns for 2018 and 2019, and they will instead once again be required to file AARs to revise prior year tax returns. As such, for those aware of the need to correct inaccuracies on 2018 and 2019 Forms 1065, prompt filing of amended returns under Rev. Proc. 2020-23 will provide partners the ability to benefit from the relief provisions of the CARES Act and tax professionals relief from the intricacies of the AAR filing requirements.
For any questions on this or any other tax-related matter, please feel free to contact Annie McGinnis at (214) 749-2412 or firstname.lastname@example.org.