It has been nearly a year since the new centralized audit regime, enacted by the 2015 Bipartisan Budget Act (BBA), became effective for partnerships. BBA partnerships are any that are subject to the new regime, which applies to tax years beginning on or after January 1, 2018. A partnership may opt out of the BBA if they have fewer than 100 partners, comprised solely of individuals, C or S Corporations, estates of deceased partners or certain foreign entities.
According to the new rules, amending returns for tax years on or after January 1, 2018, will no longer be an option for BBA partnerships. Instead, taxes due from either audit changes or administrative adjustment requests (AARs) for a BBA partnership would be paid at the partnership level, or, if the partnership elects to do so, pushed out to its partners, who would then pick up the changes on their current year returns.
Although the framework of the new rules has been known for quite a while, the mechanics have not been clarified until recently, when the IRS released several new forms to enable partnerships and their partners to handle the reporting requirements of the new regime. Please note that the forms are not yet finalized by the IRS and cannot be used for filing. Below are the relevant forms and their purpose.
This form is filed by a BBA partnership that either has been audited by the IRS and is electing to push out the changes, or is filing an AAR, whether or not the changes result in an underpayment. In tiered structures, pass-through owners receiving Form 8986 from a partnership will use the same form to further push out the changes to their owners (if they choose to do so). Form 8986 includes information about the partnership and partners, and details of the changes. For audited partnerships, it must be submitted to the partners and the IRS within 60 days of the final audit determination. The IRS copy currently must be sent by fax, although electronic filing will soon be required.
This form summarizes Form 8986 and is submitted together with the 8986 by anyone filing that form. A related voucher, Form 8985-V, is used by a pass-through partner who chooses to pay any underpayment rather than further pushing it out to its owners.
This form is filed with a partner’s timely filed federal income tax return for the reporting year, which is the year that includes the date the 8986 was received. Every partner receiving Form 8986, excepting pass-through partners, uses Form 8978 and the related Schedule A to report any additional tax due to adjustments reported on Forms 8986.
The use of the various forms can be confusing and might best be illustrated by the following example.
Assume that Partnership A has two partners: Partnership B and Individual C. All are calendar year filers. On November 20, 2020, the partnership discovers that eligible tax credits were not included on the 2019 Federal partnership income tax return and partner K-1 schedules. Because the partnership can no longer amend its 2019 return and K-1s to report the credits, it prepares Forms 8986 and 8985 to report an AAR adjustment. There is no imputed underpayment. Forms 8986 are sent to both partners. Form 8985 is faxed to the IRS, along with a copy of Forms 8986. Individual C receives her Form 8986 on December 13, 2020. She prepares a Form 8978 and attaches it to her 2020 federal income tax return. Partnership B receives its Form 8986 on December 15, 2020. Partnership B prepares and files both Forms 8985 and 8986, similarly to the upper tier partnership. Note that if there was an imputed underpayment, Partnership B could have chosen to pay the tax itself, using Form 8985-V (the payment voucher), instead of pushing it out to its partners.
The new centralized audit regime created many changes from the old system. These new forms for reporting of BBA partnership adjustments are just one example of the complexity of the new rules. Contact your CSH advisor if you need help making changes to returns for tax years 2018 or later.